You are on page 1of 100

RESEARCH REPORT 16

CORPORATE SOCIAL RESPONSIBILITY


A ROLE IN GOVERNMENT POLICY
AND REGULATION?

Constantina Bichta

The University of Bath School of Management


is one of the oldest established management schools in Britain.
It enjoys an international reputation for the quality of its teaching
and research. Its mission is to offer a balanced portfolio of
undergraduate, postgraduate and post-experience programmes,
research and external activities, which provide a quality of
intellectual life for those involved in keeping with the best
traditions of British universities.

CORPORATE SOCIAL RESPONSIBILITY


A ROLE IN GOVERNMENT POLICY
AND REGULATION?

Constantina Bichta

Desktop published by
Jan Marchant

The University of Bath


ISBN

All rights reserved

Centre for the study of Regulated Industries (CRI)


The CRI is a research centre of the University of Bath School of Management. The CRI
was founded in 1991 as part of the Chartered Institute of Public Finance and
Accountancy (CIPFA). It transferred to the University of Bath School of Management in
1998. It is situated on the 8th floor of Wessex House (North), adjacent to West car park.

The CRI is an interdisciplinary research centre investigating how regulation and


competition are working in practice, both in the UK and abroad. It is independent and
politically neutral. It aims to produce authoritative, practical contributions to regulatory
policy and debate, which are put into the public domain. The CRI focuses on
comparative analyses across the regulated industries. CRI activities and outputs include:

Regulatory statistics, information and analysis


Discussion papers and Occasional papers
Regulatory Briefs, Reviews and International series
Research Reports and Technical papers
Seminars, courses and conferences

Direct links with regulated industries, the regulators, the academic community and other
interested parties are an important feature of the work of the CRI. The CRI is non-profit
making. Its activities are supported by a wide range of sponsors.

BAA
CIPFA
Department of Trade and Industry
Environment Agency
National Audit Office
NERA
National Grid Transco

Network Rail
OFWAT
RSM Robson Rhodes
Royal Mail
Thames Water
United Utilities
Wessex Water

Further information about the work of the CRI can be obtained from:Peter Vass, Director-CRI, School of Management, University of Bath, Bath, BA2 7AY
or
CRI Administrator, Jan Marchant, Tel: 01225 383197, Fax: 01225 383221,
e-mail: mnsjsm@management.bath.ac.uk
and from the CRIs web site, which includes events and the publications list.
http://www.bath.ac.uk/cri/

PREFACE
The CRI is pleased to publish Research Report 16 on Corporate Social Responsibility - A
Role in Government Policy and Regulation? by Constantina Bichta. Constantina was a
Research Officer at the CRI until June 2003.
Understanding the potential role of CSR in companies is important to the design of
regulation. At one level it interfaces with ideas of self-regulation and co-regulation, and at
another it challenges the basis of the modern liberal market economy. Personal and moral
responsibilities of directors and employees have also to be considered alongside the role of
the corporation in meeting the legitimate expectations of its investors and shareholders.
Corporate social responsibility can clearly be seen to be a good thing. Nevertheless,
Governments have to take overall responsibility for ensuring that conduct failures - whether
market or non-market failures - are regulated appropriately, taking account of each of the
three pillars of sustainable development: the economic, social and environmental pillars.
CSR may have a role to play as one of the instruments of, or surrogates for, regulatory
policy, but that depends not only on its theoretical potential, but whether that potential can be
demonstrated in practice by companies. We hope that this research makes a contribution to
that debate.
The CRI would welcome comments on the report. Comments should be addressed to:
Peter Vass
Director CRI
School of Management
University of Bath
Bath, BA2 7AY
The CRI publishes work on regulation by a wide variety of authors, covering a range of
regulatory topics and disciplines, in its International, Occasional and Technical Paper series.
The purpose is to promote better understanding and debate about the regulatory framework
and the processes of decision making and accountability. Enquiries or manuscripts to be
considered for publication should be addressed as above.
The views of authors are their own, and do not necessarily represent those of the CRI.

Peter Vass
Director, CRI
September 2003

iii

iv

CONTENTS
1 Introduction

Page
1

2 Corporate social responsibility (CSR) definition

Operational definition of CSR


compliance plus, best practice and cost-benefit analysis
The role of government

3 The academic view theoretical debates

13

The development of corporate social responsibility


The classical view of corporate social responsibility
The new meaning of corporate social responsibility
the theory of modern corporation
Contrasting models of the corporation
a schematic overview
Business ethics

13
15
17

4 The political view proposals and policies

31

Corporate law and governance in Britain


a historical review
Current reforms
company law review (1998-2001)
Current political views on CSR
Two prevailing models of corporate social responsibility

5 The regulated industries


Introduction
The legal framework for UK regulated industries
CSR activities in UK regulated industries
The regulated companies
The water companies
The electricity companies
The rail network operator
The telephone companies
The postal services operator

6 Conclusions
The practical meaning and role of CSR for the
UK regulated companies
The impact of CSR practices on regulatory policy
Final remarks

26
27
31
40
44
48

51
51
52
54
59
62
67
72
75
80

85
85
87
90

vi

CONSTANTINA BICHTA

1 INTRODUCTION
The important thing for business and society at large to understand is the
limit to voluntary action, which is the point where government need to
intervene. If we are to live within the earths capacity and share its resources
equitably, economies must be transformed. That cannot be done by business
alone 1
This paper sets out to describe the role of Corporate Social Responsibility (CSR) in
government policy and examine its relevance to a particular sector, the regulated utilities.
Current theoretical and political debates and activities conducted at the national and
international level, suggest a widespread interest shared by government, industry, civil
society and non-governmental organisations (NGOs) regarding the role of government and
business for the natural environment, social development and social inclusion.
Ten years after the 1992 Rio earth summit, the world summit on sustainable development
(WSSD) was held in Johannesburg (26 August 4 September 2002) to review any progress
made since Rio and begin to tackle the global issues of environment and development. The
worlds governments, however, were unable to agree on a binding legal framework on the
environmental behaviour of global corporations, despite the calls for government action to
hold corporations accountable for their activities. 2 Instead, government representatives have
settled for purely voluntary industry actions ie, the global compact and type II partnership
agreements. 3 Corporate accountability and governance issues also were brought to the
attention of the summit delegates, as Friends of the Earth called for a legally binding
international framework on corporate accountability and liability.
In the UK, the battle between voluntarism and compulsion is at a critical stage (Cowe, Porritt,
2002). The government has appointed a minister for corporate social responsibility, but at the
moment the government acts as an enabler of business productivity and innovation. Social
and environmental policy issues are tackled through the setting of minimum legal standards,
the use of a light touch legislation regime such as the Pensions Act 1995 and proposals for
reforming the British company law ie, directors to act in the interests of the companys
shareholders but also take into account the wider interests of customers, employees,
suppliers, impact on the local community and the natural environment; annual reports to
include stakeholder relations, environmental and community impact. The corporate
responsibility coalition (CORE) however, has brought together a broad range of NGOs and it
has raised the stakes with Linda Perhams bill calling for compulsory social and
environmental reporting by companies.
1

Cowe R and Porritt J (2002), Governments Business Enabling Corporate Sustainability, Forum for the
Future, p3.
2
Friends of the Earth (2002), Towards Binding Corporate Accountability, Briefing.
3
Global contact is an international initiative launched by the UN on 26 July 2000. It is structured around nine
principles in the areas of human rights, labour and the environment that companies, NGOs, and other civil
society actors may adopt to improve their corporate citizenship ie, corporate responsibility, sustainable growth,
and triple bottom line. The initiative is purely voluntary, it does not enforce the behaviour or actions of
companies nor policies them. The rationale of the initiative is that voluntary initiatives and regulatory systems
complement each other and, when combined, provide powerful impetus in encouraging the wide adoption of
responsible corporate citizenship. The global contact initiative invites companies to integrate the nine
principles into their core management strategy and decision-making. For more information visit the global
contact official website: www.unglobalcompact.org.

Dr Constantina Bichta, Research Officer, Centre for the study of Regulated


Industries (CRI), University of Bath School of Management
1

CORPORATE SOCIAL RESPONSIBILITY


In such a political environment, industry bodies like the Business in the Community
(BitC,UK) anxiously work to improve the impact of their members on local communities. 4
During last year, BitC has undertaken two particular initiatives to help members towards
improving their social performance. These initiatives comprise a corporate responsibility
index and the corporate impact reporting initiative. The former is a benchmark tool that
provides companies with a systematic process through which they can compare their
management process and performance against others in their sector. By doing so, companies
can improve performance amongst their peers. The latter, in essence, is a framework for
companies to measure and report on responsible business practices in the areas of
marketplace, environment, workplace, community and human rights. Both schemes were
introduced on a purely voluntary basis. 5
In the academic circles, some of Europes leading business schools have teamed up with
more than sixty multinationals to launch the European academy of business in society. In its
own words, the academy was created as a response to calls from the public, as well as from
managers, to better integrate the social responsibility aspect into business activities and has
a mission to drive CSR into the mainstream of business practice. For the mission to be
accomplished, the academy strives to undertake the following activities:

to integrate the changing role of business in society into the core of business education;
to deliver interdisciplinary research on CSR and create a global research bank on the role
of business in society;
to become Europes training gateway to best-in-class training practices and learning
resources for businesses and corporate academies. 6

All the above activities testify the growing interest amongst politicians, industry and
academics around the role of government and business in corporate social responsibility and
performance. But do we beg the question of CSR in government policy all of a sudden?
What the situation has been to date and what the situation could be if government adopts an
active role in corporate social responsibility and performance?
To attempt to answer the first question, it is fair to argue that the role of CSR in government
policy is not a new issue. At different periods of the industrial societys history, social
movements have questioned business social responsibility and governments have responded
with legal measures. The scientific announcements regarding ozone depletion aroused public
concern for the natural environment in the early nineties and since the mid nineties
companies have become more and more questionable for human rights and labour
relationships in third world countries. Sustainable development, triple bottom line reporting
and innovative techniques supporting clean and renewable sources of energy are terms that
industry is puzzled with on daily basis. 7 In this climate, the United Nations and governments
are developing frameworks to help companies improve their corporate citizenship and
responsibility. Amongst these, the global compact, the universal declaration of human
rights, the international labour organisations (ILO) declaration on fundamental principles
and rights at work and the Rio declaration on environment and development are just a few
4

www.bitc.org.uk.
BitC (2002), Improving and Communicating Corporate Responsibility.
6
The academy is part of the wider European Business Campaign on Corporate Social Responsibility, led by
CSR Europe, the Copenhagen Centre and the Academy partners, which is an ongoing initiative until 2005 with
the aim to raise awareness and engage business people on the topic of CSR.
7
Reporting of social, economic and environmental issues.
5

CONSTANTINA BICHTA
examples. These guidelines, developed to help companies to improve their performance,
raise however, two important questions: First, they do not provide a legal binding framework
for industry to abide by. It is left to industry to adopt them if it wishes to be a better citizen
of the world. Secondly, they raise serious questions for increased competitiveness,
particularly for multinationals (who operate at different countries), when they are not
unilaterally enforced at the national and local level.
Consequently, the two later points beg another question of research interest: what role could
government play in CSR? At the closing stages of the WSSD, it became clear that
government and industry found it difficult to agree on common duties and objectives
favouring the environment and development. To this end, one may also add the main
purpose and function of business in society, which to date has been to increase profitability
for shareholders.
Voluntary industry activities are not a good enough response either to overcome
environmental problems ie, depletion of scarce resources or tackle problems of development
and social inclusion ie, equal pay, working conditions. As the industry admitted at the end of
the WSSD, it will restrain itself from committing to high technological investment on
renewable energy and heat-power combustion unless the regulatory framework either
requires it or plays the role of a subordinate. 8
It is the objective of this research report to explore the role of CSR in government policy in
the context of the regulated industries. But first, let us introduce the notion of CSR.

The notion of corporate social responsibility (CSR) and its discourse


The notion of corporate social responsibility (CSR) is not new in our society. It was born
when corporations were born and societies to accommodate them. The soul of corporate
social responsibility is what the French philosopher Rousseau understood to be the social
contract between business and society. Rousseau conceptualised the relationship between
business and society as being a symbiosis. The Greek word symbiosis means the coliving and co-existence of two parties in a mutually advantageous relationship. Thus, the
social contract understands men (social members) as being able to act freely in a civil society
that is united by a general will or volonte generale: The social contract that brings society
into being is a pledge, and the society remains in being as a pledged good. 9
The social contract signifies the relationship between society and business. Business hosts
their operations within society and in return society expects business to show responsibility
for aspects of its operations. According to the contract, society recognises organisations as
agents, particularly in the eyes of the law, and authorises them to use land, natural resources
and offer employment. From the business point of view, they improve the quality of life of a
society. One can take the argument of the social contract further by adding to it that business
is socially, morally and politically bounded to improve the quality of life of society: they

In its own words, industry requires a clear, equitable and predictable decision-making framework in which to
make long term investment and dedications of capitalinvestment in countries where regulation is lax would
put such investments at risk. Therefore, building and strengthening capacity in international, national and local
governments to develop, implement enforce the regulatory framework may be priority for government at
www.johannesburgsummit.org, Key Business Messages.
9
Jean-Jacques Rousseau, The New Encyclopaedia Britannica, Chicago, Vol 26, pp938-942.

CORPORATE SOCIAL RESPONSIBILITY


are expected to enhance the life of consumers and workers, to promote justice by avoiding
deception or fraud, respect their workers and avoid harming any other social groups. 10
It is, however, the manner in which the social contract has been conducted, particularly on
behalf of corporations during the past a hundred years, that makes the issue of corporate
social responsibility so prominent and important nowadays. It may be that the reason behind
the misconduct of the social contract is the different understanding and explanations
developed around the notion of CSR. The social contract is just one plausible explanation
of what is CSR. Many competing arguments that justify the nature and scope of CSR have
been developed over the years, all of which have resulted in offering different discourses of
the notion. 11
The classical view of Adam Smith of perfect markets and the invisible hand have been the
core perception of business responsibilities for the past three hundred years. In the early
twentieth century, the social responsibility of business was tied up with market performance.
Oliver Sheldon, encouraged management to take the initiative in raising both ethical
standards and justice in society through the ethic of economising. 12 By doing so, business
provides wealth in society and increases its standard of living whilst retaining a satisfactory
level of profit. Not long ago, the social responsibility of business was understood to be the
promotion of the exclusive interests of a firms shareholders, according to Milton Friedmans
advocates.
During the 1970s, most social issues became public policy matters and legislation was passed
to address health and safety at work, environmental protection and consumer protection
rights. The public policy approach provided a legitimacy for socially responsible actions on
behalf of management, as government, acting on behalf of its citizens, had a legitimate right
to provide guidelines for managers and shape corporate behaviour to correspond with societal
expectations. The public policy approach contended that the social responsibility of business
in not only to perform well in the marketplace and meet its economic objectives but also to
follow the directives of society at large, as expressed in and through the public policy
process. 13 It was therefore argued that the public policy process and marketplace are both
sources or guidelines for managerial behaviour.
In contrast with public policy arguments, other scholars tried to distinguish between CSR and
corporate social responsiveness by arguing that the latter refers to the capacity of an
organisation to respond to social pressures. Social responsiveness describes the act of
responding to social expectations and consequently, corporate social responsiveness
supporters will look for mechanisms, procedures, arrangements and patterns of behaviour that
demonstrate the capabilities of an organisation to responding to social pressures (Buchholz,
1993). Both approaches however, public policy and social responsiveness, have been
criticised on the basis of ignoring the deeper values involved in CSR that is failure of
advancing an understanding of the normative dimension related to corporate social behaviour
(Buchholz, 1993).
10

Bichta C (2000), The Key Determinants of Environmental Performance - Case studies from the
chemical/fertiliser and metal sectors, PhD Thesis, School of Management, University of Bath.
11
Bichta C (2002), Corporate Socially Responsible (CSR) Practices in the Context of Greek Industry, Corporate
Social Responsibility and Environmental Management Journal, (forthcoming).
12
That is to economise the use of resources and combine resources efficiently so that business can earn profits
to continue operability and expand into new markets.
13
Buchholz R (1993), Principles of Environmental Management-The Greening of business, Prentice Hall, USA.

CONSTANTINA BICHTA
In recent years, CSR has been linked with sustainable development. The sustainable
development position holds that business has a moral responsibility to insure that its activities
be ecologically sustainable. Business remains free to pursue profits within the rules of the
game but the rules must be changed to include the obligation to leave natural ecosystems no
worse off in the process. The sustainable development model seeks to combine the natural
constraints established by ecological laws with minimal moral constraints placed upon
business activity. Accordingly, the World Commission on Environment and Development
defines sustainable development as development that meets the needs of the present without
compromising the ability of future generations to meet their own needs. Contemporary CSR
accept this definition, and this places an obligation on business not to harm the ecosphere.
Des Jardins (1998) explains that business activity would be considered as harming the
ecosphere when it uses resources at unsustainable rates or creates wastes that cannot be
absorbed by the system. 14
It is such competing arguments that make it very difficult for industry, academics and
government practitioners to reach a commonly accepted view and a shared understanding of
the meaning of CSR. This research report will describe the prevailing competing arguments
surrounding the notion of corporate social responsibility and examine its relevance to the UK
regulated utilities. Given also the wider implications that the CSR notion brings for
government, this research report will discuss the role of CSR in government policy in general
and in the said industrial sector in particular.
The proceeding chapters of this paper are structured as follows:

Chapter 2 deals with the definition of CSR in both its theoretical and operational terms.

Chapter 3 goes into detail to present the prevailing academic views regarding the notion
of corporate social responsibility.

Chapter 4 presents the role of government in relation to CSR by attaching more weight
to the UK experience and the European Unions position on corporate social
responsibility.

Chapter 5 comprises the empirical chapter with focus on the regulated industries. The
chapter discusses the case of CSR as the companies themselves currently practice it.

Chapter 6 states the implications of CSR for government policy in general and the
regulated industries in particular.

14

Des Jardins J (1998) Corporate Environmental Responsibility, Journal of Business Ethics, Vol 17, pp825-838.

CORPORATE SOCIAL RESPONSIBILITY

CONSTANTINA BICHTA

2 CORPORATE SOCIAL RESPONSIBILITY


(CSR) DEFINITION
The notion of corporate social responsibility has been open to various interpretations,
reflecting the relationship of business and society at different times of history.15 As argued in
Chapter 3, the predominant view concerning business responsibility to society is derived
from the neoclassical economic position that sees the promotion and serving of interests of
the firms shareholders as being the main responsibility of business. 16 Whilst the notion of
corporate social responsibility has evolved over the years, in the context of this research
report it is imperative to articulate the current meaning of CSR and, thereafter, discuss the
role of government in relation to corporate social responsibility.
Historically speaking the notion of CSR has been associated with corporate philanthropy.
Well known British and American entrepreneurs realised the need for getting involved with
the community and contributing to its welfare by building schools and hospitals and making
donations. 17 Porritt and Cowe (2002) cite that it was altruism that led Pilkington and Marks
and Spencer to set up BitC in 1982. During the late eighties and early nineties pubic opinion,
social movements and activities by non-governmental organizations (NGOs) led businesses
to develop a more sophisticated approach to CSR, known as enlightened self-interest. In
this context, the chemical industry developed the responsible care programme in Canada in
the mid 80s but participation to the programme became a requirement for membership of the
Chemical Industries Association. The programme was taken by the US Chemical
Manufacturers Association (CMA) in 1988 and the UK Chemical Industries Association in
1989 and members were required to educate their staff and work closely with customers,
transporters, suppliers, distributors and communities to achieve effective environmental
management of processes and products. 18 The Responsible Care programme is an example
of business attitude to improve performance for business benefits (ie, improved public image
due to rise of global environmental concerns) and wider benefits to society (ie, improved
environmental and social impact of processes and products).
Since the mid 1990s the notion of CSR has been associated with the terms of corporate
citizenship, corporate sustainability and triple bottom line. The term corporate
citizenship describes a firms engagement with stakeholders rather than shareholders alone.
Corporate sustainability refers to corporate behaviour that is likely to affect sustainable
development ie, company activity that creates opportunities for sustainable development.
Triple bottom line usually refers to the balance and equal promotion of the economic, social
and environmental interests of a business. These contemporary interpretations of CSR,
however, are linked to the idea of self-interest and espouse the business case for corporate
social responsibility as argued next.
The current prevailing definition of CSR advocates that the firm should engage with
stakeholders for long-term value creation. This does not mean that shareholders are not
15

See p4 in the Introduction.


Friedman M (1970), The Social Responsibility of Business is to Increase its Profits, Business Ethics
Readings and Cases in Corporate Morality, Hoffman W M, Frederick R E, Schwartz M S (eds) (2001) (4th edn),
McGraw Hill Inc, USA, pp 156-160.
17
See Chapter 3 p13-15.
18
Tapper R (1997), Voluntary Agreements for Environmental Performance Improvement - Perspectives on the
chemical industrys Responsible Care program, Business Strategy and the Environment, Volume 6, pp287-292.
16

CORPORATE SOCIAL RESPONSIBILITY


important, or that profitability is not vital to business success. On the contrary, in order for
the firm to survive and be profitable it must engage with a range of stakeholders whose views
on the companys success may vary greatly. The process of engagement creates a dynamic
context of interaction, mutual respect, dialogue and change, which will allow socially
responsible business to achieve lower costs, higher revenues, improved reputations, lower
risks and ultimately benefit shareholder value. This view of CSR corresponds to the
commonly cited business case for it. 19
The current definition of CSR - that postulates the engagement of a firm with stakeholders
rather than shareholders alone - is derived from the stakeholder model of a firm, which was
developed in the United States in the mid 1980s. Epistemologically however, the stakeholder
model of the firm and the current business case for CSR are different, as it will be shown in
Chapters 3 and 4. This is mainly because the stakeholder model of the firm is rooted on the
(deontological) assumption that the firm ought to engage stakeholders in the decision-making
of the firm as they are likely to be affected by the firm activities whereas, the business case
for CSR is rooted on the (utilitarian) notion that shareholders will increase their financial
interests by engaging in dialogue with other stakeholders of the firm.
To summarise, in its conventional form corporate social responsibility is seen as profitability
plus compliance plus philanthropy. The current meaning of corporate responsibility is
associated with the recognition that day to day operating practices affect stakeholders and
that is in those impacts where responsibility lies, not merely in efforts to do good (Andriof et
al, 2002).

Operational definition of CSR - compliance plus, best practice


and cost-benefit analysis
From the above it can be argued that the current definition of CSR is developed around two
main principles:

the interests of the firms stakeholders should be represented at the company board and
the decision-making process of the firm;
since corporate law protects the interests of the firms shareholders, a corporate socially
responsible or corporate citizenship stance would involve the formulation of decisions
that go beyond legal requirements and exceed the law, compliance plus.

Thus, the notion of CSR assumes corporate behaviour that goes beyond legal requirements.
CSR is the detailed issues which an organization may be taking into account when
developing strategies and on which an organization exceeds its minimum required obligations
to stakeholders. 20 Traditionally, these issues are both internal and external to the
organization ie, employee welfare, working conditions, green issues, products etc. Today, the
corporate social responsibility handbook extends to human rights, workplace practices,
globalisation practices, corporate power, environmental impact, corruption, community
affairs and effective stakeholder dialogue (Cowe, Porritt, 2002). By meeting its legal
obligations an organization should not necessarily assume socially responsible behaviour.
19

Andriof J, Waddock S, Husted B, Sutherland Rahman S (eds) (2002), Unfolding Stakeholder Thinking Theory, Responsibility and Engagement, Greenleaf Publishing, UK.
20
Johnson G, Scholes K (1999), Exploring Corporate Strategy, Fifth Edition, Prentice Hall, London.

CONSTANTINA BICHTA
Generally speaking, an organisation will avoid breaking the law because of the fear of
prosecution (Bichta, 2000). The notion of CSR confers to activities that exceed legal
requirements and the way in which the organization will manage the CSR agenda.
In practice, CSR is currently translated as best practice ie, the rigorous assessment and
management of a companys impacts across the entire business from the point of material
supply to product disposal (Cowe, Porritt, 2002). To conclude, in its broadest sense,
contemporary CSR represents companies responsibility to improve all their impacts on
society, when not required to do so by law.
It is fair however to argue that within the present (business) share ownership paradigm,
shareholders will have the final say if corporate action is not constrained by regulation. This
position might be altered by changing the relationship between the board and stakeholders,
which is the intention of the current meaning of CSR. It may be that government has a role to
play towards creating the conditions where such a switch in emphasis can be made.
To be able to discuss the role of government in relation to CSR, the development of an
operational and measurable definition of CSR is important. To this end, the World Bank has
developed an operational term of CSR which considers CSR as the process of managing the
costs and benefits of business activity to both internal (ie, employees, shareholders, investors)
and external (institutions of public governance, community members, civil society groups,
other enterprises) stakeholders. Setting the boundaries for how these costs and benefits are
managed is partly a question of business policy and strategy and partly a question of public
governance. 21
The next section discusses the role that government has played to date in relation to corporate
socially responsible behaviour.

The role of government


From the industrial revolution to recent years, social objectives have been almost entirely the
responsibility of government. Social movements, NGO activity and pressure groups during
the 70s and 80s led to the mobilisation of public opinion demanding from corporations to
demonstrate a socially responsible stance. Since the earlier twentieth century, European
member states have developed legislation to control the relationship between employee and
the firm, health and safety at work, issues of environmental interest, discrimination and equal
opportunities at workplace. Across Europe, state owned companies were created to pursue
commercial and social objectives, whereas private sector companies were allowed to pursue
their commercial objectives almost exclusively.
Legislation, regulation and taxation have been the favourable tools employed by government
to promote and protect social objectives. In the area of the environment, command and
control techniques have been favoured by the European Union since the 1970s whereas a
shift towards shared responsibility between government and industry is another favourable
policy approach since the mid 1990s.

21

Fox T, Ward H, Howard B (2002), Public Sector Roles in Strengthening Corporate Social Responsibility A
baseline story, The World Bank.

CORPORATE SOCIAL RESPONSIBILITY


In the UK, the governments privatisation programme of the 1980s shifted public expectation
of the private sector. Whilst until then, social objectives had been mainly the responsibility
of government, the privatisation of gas, water and electricity introduced a new paradigm. It
created public companies owned by shareholders pursuing the same kind of financial returns
as in any other public company, but the companies had also clear social objectives. In the
case of the privatised utilities, these social objectives were managed through the regulatory
regime, but the existence of the companies as stock market vehicles demonstrated that
financial and non-financial objectives could co-exist (Cowe, Porritt, 2002).
The Labour government has maintained the interest to bridge public and private, social and
financial objectives by drawing the private sector into the provision of social goods ie,
public-private partnerships. The government has taken steps to reinforce the responsibility of
the private sector with regard to its social and environmental impact. A number of legislative
measures have been passed to support sustainable development including the climate change
levy, the community investment tax credit and the Pensions Act. The company law review
(1998-2002) has rejected the concept of pluralism which would have required directors to
consider the interests of other stakeholders as well as pursuing the interests of shareholders,
but the governments white paper, which incorporated the reviews recommendations, has
communicated the message that directors would be foolish to omit such matters. 22 23
A question of interest therefore in the contemporary debate of CSR is whether government
should assist business to exceed its legal obligations and hence commit itself to socially
responsible behaviour, as defined in current terms. A second question considers the nature of
a potential government role: Should government create the opportunities/enable business to
opt for the business case for CSR? Or should government create the environment for business
to realise the potentials of seeking legitimacy directly from the firms stakeholders rather than
shareholders alone?
Interestingly, recent published studies suggest that government may play a role to encourage
and promote the social responsibility of business. As Table 1 shows, the World Bank has
identified four principal public sector roles in relation to CSR that are mandating, facilitating,
partnering and endorsing roles.
Table 1: Public sector roles
Mandating

Facilitating

Partnering
Endorsing

Command and
control
legislation
Enabling
legislation
Funding support

Regulators and
inspectorates

Combining
resources
Political support

Stakeholder
engagement

Creating incentives
Raising awareness

Legal and fiscal


penalties and
rewards
Capacity building
Stimulating
markets
Dialogue
Publicity and
praise

Source: Fox, Ward, Howard (2002), The World Bank

22

The Company Law Review Steering Group (2001), Modern Company Law - For a competitive economy,
Final Report, DTI.
23
Department of Trade and Industry (2002), Modernising Company Law, Cm 5553-I.

10

CONSTANTINA BICHTA
Public sector activities may vary depending on the CSR issue at stake. Table 2 shows
potential public sector activities for the CSR issues of corporate governance and community
development.
Table 2: Classification of public sector activities
Public sector
role
CSR theme
Corporate
governance

Community
development

Mandating
Stock exchange
regulations and
codes; company
law
Mandating
corporate
contributions

Facilitating
Implementing
international
principles
Tax incentives;
timebank
schemes; league
tables to promote
pear pressure

Partnering
Multistakeholder
code
development
Public-private
partnerships

Endorsing

Publishing
leading
corporate
givers

Source: Fox, Ward, Howard (2002), The World Bank

Cowe and Porritt (2002) call for intelligent government action to ensure that corporate
action will contribute towards sustainable development since voluntary corporate action alone
will not be enough. This government intervention at the beginning will consist of a set of
soft measures such as changing the political environment ie, mandatory company reporting
and hence, building up to hard action - laws and regulations. The authors belief is that the
more corporate performance is exposed to the public gaze through effective reporting, the
more effective civic regulation can be and the less the need for formal government
measures. Cowe and Porritts view corresponds to a government role that will increasingly
enable companies to seek legitimacy directly from their stakeholders.

11

CORPORATE SOCIAL RESPONSIBILITY

12

CONSTANTINA BICHTA

3 THE ACADEMIC VIEW - THEORETICAL


DEBATES
The development of corporate social responsibility (CSR)
The notion of corporate social responsibility made its appearance almost a hundred and fifty
years ago. It emerged in the United States of America as a social and political reaction to the
rapid growth of capitalism during the thirty years following the American civil war (18615). 24 Big companies, as we know them today, appeared in the United States in the 1870s.
But as they grew, an anti-trust movement against the robber barons, also grew. 25
McEwan (2001) explains that the rationale for the anti-trust movement was the new
industrial trusts and corporations which had become too powerful, wasted resources, were
politically dangerous and socially irresponsible (p4).
The American government assumed responsibility for correcting the social behaviour of big
corporations as early as the 1890s and it passed laws on child labour, safety at industrial sites,
and on workers rights to form trusts. 26 Nader et al concede that American corporations
became more aware of their public responsibilities after the US Supreme Court
announcement in 1906 which condoned that the corporation is a creature of the state. It is
presumed to be incorporated for the benefit of the public. It receives certain special
privileges and franchises, and hold them subject to proper government supervision. 27 The
American government extended legislation on labour protection, public utilities and banking
services during the nineteenth and in the early twentieth century. Trying to distance
themselves from government intervention however, North American entrepreneurs like
Francis C Lowell, Ford and Rockefeller laid education in the centre of the relationship
between individual entrepreneur and corporate responsibility. 28 For these entrepreneurs
education was the means to personal advancement. Their contributions to private universities
introduced a culture of private support for public works which still persists in the American
thinking today.
In the UK, the idea that business should take into consideration social and not only economic
issues is traced back to the Victorian industrialist era. Amongst the pioneers of this new era,
Robert Owen, Lord Shaftsbury, Lord Ashley and John Stuart Mill called for a more
responsible approach to the needs of those who failed to prosper from the industrial
revolution. Entrepreneurs such as Robert Owen, Cadbury and Leverhulme adopted the
approach of enlightened self interest, by arguing that workers who were treated well would
respond well (Cannon 1994 p17). These entrepreneurs funded a range of welfare activities
including public health and education.
In contrast to the USA, in Europe the commitment to intervention, education and a form of
partnership between the state and the enterprise to deliver social goals has persisted since the
24 McEwan T (2001), Managing Values and Beliefs in Organisations, FT Prentice Hall, London.
25
Josephson M (1962), The Robber Barons, 2nd edn, Harvest/HBJ Books, New York.
26
Farmer R, Hogue D (1973), Corporate Social Responsibility, Social Research Associates Inc, USA.
27
Nader R, Green M, Seligman J (1997), The Corporate Impact, Issues in Business and Society, Steiner G,
Steiner J (eds) (2nd edn), Random House, New York, pp22-35.
28
Cannon T (1994), Corporate Responsibility A textbook on business ethics, governance, environment, role
and responsibilities, Pitman Publishing, London.

13

CORPORATE SOCIAL RESPONSIBILITY


nineteenth century and particularly the earlier twentieth century. In France and Germany
much of the impetus for industrialisation and change came from government action during
the nineteenth century. In the middle of the twentieth century, Scandinavian governments
were committed to develop and establish a bond between the individual and the enterprise.
They put a strong emphasis on community based projects which involved the provision of
business economic support for school and college facilities for workers and their families,
medical services, etc. This tradition of intervention created the climate which allowed the
state to develop the most comprehensive array of social welfare support in the world in the
middle of the twentieth century (Cannon, 1994).
Despite government intervention however, by the 1970s corporations had grown faster than
the total world economy. Nader et al (1974) cite a few of the facts: in 1974, Exxon
announced greater sales than each of the gross national products (GNPs) of Austria, Denmark
and South Africa. The same year General Motors employed more people, 734,000 than the
states of California, New York, Pennsylvania and Michigan combined. By 1974, the number
of American corporations owing more than half of the total assets of the remaining 1.8m
corporations fell from 200 to 100. Consolidation amongst corporations continued during the
eighties and resulted in a further reduction of the number of American multinationals holding over half of the assets of the remaining two million corporations - from 100 to 80.
By 1991 the leading 50 global economies included 13 major global corporations with greater
assets than several Western countries.
It may be that the notion of corporate social responsibility has its foundations in the 19th
century, but the modern understanding of corporate social responsibility is particularly linked
with the social movements of the 1970s in the USA and Western Europe. The prolonged
period of post-war economic growth and the birth of vibrant cultures such as
environmentalism and feminism, mobilised the public in demanding from companys
commitment to environmental protection, recruitment of minorities, charitable donations, and
community investment. 29 Rachel Carsons book - Silent Spring, stressed all the problems
that the unrestricted use of pesticides caused on air and water. 30 Miller (1995) cites specific
events such as the first earth days, held in America in 1970s, the demand by anti-Vietnam
war activists for businesses to stop producing chemical weapons, African-American and
female groups campaigns for equality in the workplace, and protests against the use and
transportation of toxic materials as having an impact on the way companies were expected to
run their business.
The increased public interest towards societal problems initiated the institutionalisation of
many of them such as environmental issues in business and government. 31 In Britain and the
United States new laws were introduced and new agencies were created like the Department
of Environment and Environmental Protection Agency respectively. Corporations responded
positively to the new legislation realising first, that environmental policy could not be
formulated without their expertise, and secondly, that a uniform set of national regulations
would provide a level playing field for business. 32

29

Miller W H (1995), More than Just Making Money - The last 25 years have seen industry assume a new
mission, corporate social responsibility, Industry Week, 244, 13, pp91-95.
30
McCormick J (1989), The Global Environmental Movement Reclaiming paradise, Belhaven Press, London.
31
Buchholz R (1993), Principles of Environmental Management - The greening of business, Prentice-Hall,
USA.
32
Enloe C H (1975), The Politics of Pollution in a Comparative Perspective, Longman, London.

14

CONSTANTINA BICHTA
In conclusion, the meaning of corporate social responsibility in the 1970s was associated with
the excluded social costs of production and the hidden costs occurred by society as a result of
business activities including:

industrial pollution and toxic waste;


racial and sexual discrimination;
political influence of powerful corporations;
invasion of employees privacy;
deceptive information in marketing;
product safety;
the price of technology, effects of pesticides, aerosols and nuclear power;
increasing concentration of wealth and income in fewer hands;
business crime (Nader et al, 1974).

Alongside the 1970s events and the social and political movements, the statement by Milton
Friedman on the social responsibility of business has been the starting point of academic
discussion of corporate social responsibility.

The classical view of corporate social responsibility


Milton Friedman (1970) criticised corporate social responsibility arguments by stating that
few trends could so thoroughly undermine the very foundations of our free society as the
acceptance by our corporate officials of a social responsibility other than to make as much
money for their stockholders as possible.
The starting point in Friedmans argument is that people have responsibilities but business
does not. A corporation is an artificial body created by real people, so business cannot be
expected to act in the same way that people do. Friedman examines the notion of social
responsibility by questioning what is implied by it. The starting point of his discussion is
with businessmen and with the CEO who have the responsibility of running the business.
The role that Friedman attributes to the CEO in a corporation is that of an agent. The
corporation employs him to make as much money as possible. Thus in his capacity as a
corporate executive, the manager is the agent of the individuals who own the corporation
and his primary responsibility is to them (Friedman, 1970, p156). Friedman does not deny
that corporate executives as individuals may also act based on their own will. However,
these actions are acceptable outside the area of business since the individual uses his own
time and money. If the executive officer then acts in a socially responsible way, it is not in
the interests of his employers, because he acts as a principal not as an agent.
Friedman saw the decisions of a few executives to spend money on social purposes as being
the duty of civil servants. Whilst civil servants are appointed by government, and the
executive performs the role of a civil servant, it becomes apparent that corporations accept
political mechanisms and not market mechanisms as factors that determine the allocation of
scarce resources. 33 Thus in Friedmans view, if firms are to exercise the notion of corporate
social responsibility, the foundations of a free market system would be undermined by
33

According to Friedman, the principle which underlines the political mechanism is conformity, where the
individual must serve a more general social interest. The individual may express its own views but if overruled
he must conform to the majority views.

15

CORPORATE SOCIAL RESPONSIBILITY


replacing it with a centrally controlled system of governmental control of prices and wages.
As Friedman puts it, if social responsibility is taken seriously, it would extend the scope of
political intervention to every human activity. This would undermine the political principle
of the market mechanism, which is unanimity. 34 With regard to Friedmans argument, it is
important to point out that he does not claim that the corporation has no responsibilities at all.
On the contrary, he argues that corporations are responsible, but only to one group of people the stockholders, since they bring the money into corporation and appoint managers to
maximise their capital (Bichta, 2000).
Before Milton Friedman, classical economists, with Adam Smith as their pioneer, also
assumed that if the government would mind its own business, markets can still be perfect
and self-correcting, and the gross national product (GNP) could be the proper barometer of
societal wealth. Friedman defines the social responsibility of business in a strictly limited
neo-classical economic sense. As Roome (1997) says, the orthodoxy of neo-classical
economics is that business is a collective term to describe that part of society which is
concerned with the production and exchange of goods and services, in market and mixed
market economic systems. 35 What distinguishes business organisations from other sectors of
society is that their viability depends on securing profits, the excess of revenue from the sale
of outputs over the costs of their production. It follows that the principal focus of business
activity is the market and the main purpose of business is to make money and increase
profitability. Roome also argues that by accepting that the purpose of business is to make
profit this implies the acceptance of two axioms:
First, given a risk free choice between economic opportunities, managers of
business will prefer options which yield more profit to those that yield less.
Second, managers involved in pure profit maximising decisions will confine
their frame of analysis to an assessment of the stream of revenue and costs
projected to accrue to the company from alternative investments. These
streams determine profitability when considered in relation to the risks
associated with each other alternative project (p47).
Friedmans position constitutes the heart of managerial capitalism, which is built on the idea
that in return for controlling the firm, management vigorously pursues the interests of
stockholders. Both, however, the neoclassical view of business responsibility to society and
the managerial view of capitalism has been challenged ever since the 1970s. Scholars have
questioned the adequacy of the neoclassical paradigm as the adequate theoretical framework
for understanding and interpreting the relationship between individuals and society and
individuals and organisations. The central argument of managerial capitalism has also been
under scrutiny and new theoretical perspectives have contributed to the rise of a new
approach of governance in business.

34

According to the principle of unanimity, in an ideal free market, cooperation is voluntary and all parties to
cooperation benefit or they need not participate. Under the principle of unanimity, there are no values, no social
responsibilities other than the shared values and responsibilities of individuals. Therefore society is a collection
of individuals and of the various groups they voluntarily form (Friedman, 1970).
35
Roome N (1997), Corporate Environmental Responsibility, Business and the Natural Environment, Bansal P,
Howard E (eds), Butterworth-Heinemann, Oxford, pp40-62.

16

CONSTANTINA BICHTA

The new meaning of corporate social responsibility - the


theory of modern corporation
The classical view of business responsibility to society has been challenged by new
arguments that made their appearance in the 1980s and have seen to contribute to the
development of the theory of the modern corporation (Bichta, 2000). These new arguments
attach a new meaning to corporate social responsibility as they consider:

a new stakeholder approach as opposed to the traditional view of promoting the exclusive
interests of stockholders;
managerial values and discretion as being key promoters of socially responsible actions
and the notion of organisational moral responsibility analogous to that of individuals;
new aspects in corporate legitimacy;
alternatives to the traditional view of corporate governance;
the role of an interventionist government in enhancing corporate social responsible
behaviour (Bichta, 2000). 36

Each of these aspects are considered in turn.

The stakeholder theory


The central position of managerial capitalism has been challenged by the stakeholder theory
of modern corporation. The stakeholder theory has made its appearance in the early eighties,
and the pioneers of the theory have concentrated their arguments on three main aspects of the
theory: a descriptive/empirical, an instrumental and a normative aspect. 37 Although in the
management literature, the stakeholder theory corresponds to all three approaches, the
discussion in the following paragraphs concentrates on the normative aspect as the
underpinning basis of the stakeholder theory of modern corporation.
The stakeholder theory calls for a revitalisation of the concept of managerial capitalism by
replacing the notion that managers have a duty to stockholders with the concept that
managers bear a fiduciary relationship to stakeholders.38 The stakeholder theory concentrates

36

The theory also explores the criteria on evaluating the legitimacy of corporate social responsibility.
The stakeholder theory in its descriptive/empirical form is used to describe and sometimes explain specific
corporate characteristics and behaviours. The instrumental aspect of the theory is used to identify the
connections or lack of connections between stakeholder management and the achievement of traditional
corporate objectives ie, profitability, growth. The normative aspect of the theory is used to interpret the function
of the corporation, in Donaldson T, Preston, L E (1995), The Stakeholder Theory of the Corporation - Concepts,
evidence and implications, Academy of Management Review, Vol 20, pp65-91.
38
In short, the concept of the stakeholder is a generalisation of the notion of stockholders, who themselves have
some special claim on the firm. In the stakeholder theory, just as stockholders have a right to demand certain
actions by management, so do the other stakeholders have a right to make claims. The main question in the
stakeholder theory is about the exact nature of these claims, however the theory applies the same logic used by
the stockholder theory. Stakes require action of a certain sort, and conflicting stakes require methods of
resolution. The stakeholder theory does not give primacy to one stakeholder group over another, though it is
expected there will surely be times when one group will benefit at the expense of others. However,
management must keep the relationships amongst stakeholders in balance. See Freeman R E, Business Ethics
Readings and cases in corporate morality, Hoffman M W, Frederick R E, Schwartz (eds) (2001), 4th edn,
McGraw-Hill Inc, USA, pp160-168.
37

17

CORPORATE SOCIAL RESPONSIBILITY


its focus on a particular question: For whose benefit and at whose expense should the firm
be managed? 39
To seek answers to this question, the pioneers of the theory define the stakeholders as all
these groups that have a stake in, or a claim on the firm, including owners, management,
suppliers, customers, employees and the local community (Evan, Freeman, 1988). Drawing
on Kantian philosophy, they argue that each of these stakeholders groups has a right not to
be treated as a means to some end, and therefore must participate in determining the future
direction of the firm in which they have a stake.
To be specific, Evan and Freeman (1988) use two themes which represent two branches of
Kantian philosophy and moral theory to justify the reasoning of the central argument of
stakeholder theory. The first theme is concerned with the rights and duties of the owners
(and their agents) of private property, and the effects of this property on the rights of others
(Evan, Freeman, 1988, p148). The second theme is concerned with the consequences of
managerial capitalism and the effects of the modern corporation on the welfare of others.
The view of the corporation as having no right to decide how things are going to be for its
constituents is challenged by the position that if the modern corporation requires treating
others as means to an end, then these others must agree on, and hence participate (or chose
not to participate) in, the decisions to be used as such (Evan, Freeman, 1988, p148). Thus,
property rights are legitimate but not absolute, particularly when they conflict with rights of
the others. As the authors advocate the property rights are not a licence to ignore Kants
principle of respect for a person.
In terms of corporate externalities and harmful actions, the stakeholder theory maintains that
persons are responsible for the consequences of their decisions and activities, and hence any
theory that seeks to justify the corporate form must be based at least partially on the idea
that the corporation and its managers as moral agents can be the cause of and can be held
accountable for their actions (Hoffman, Frederick, 1998, p148).
Thus, a stakeholder theory needs to be consistent with two principles, namely the principle of
corporate rights (PCR) and the principle of corporate effects (PCE). According to the
principle of corporate rights, corporation and managers may not violate the legitimate rights
of the firms constituents to determine their own future. The principle of corporate effects
retains that the corporation and its managers are responsible for the effects of their actions on
others. Foremost, the acceptance of these two principles facilitates the development of two
further stakeholder management principles which serve as the foundation for articulating
the stakeholder theory: the principle of corporate legitimacy and the stakeholder fiduciary
principle. The principle of corporate legitimacy redefines the purpose of the firm in line
with the principles of corporate rights and effects. The stakeholder fiduciary principle
defines the duty of management to recognise the claims of the stakeholders.
The structural mechanisms to facilitate the application of a stakeholder management concept
are two:

39

Evan W M, Freeman R E (1988), A Stakeholder Theory of the Modern Corporation - Kantian capitalism,
Business Ethics - Readings and cases in corporate morality, Hoffman M W, Frederick R E (eds) (1995), 3rd edn,
McGraw-Hill Inc, USA, pp145-154.

18

CONSTANTINA BICHTA

a stakeholder board of directors which will consist five stakeholder groups including
employees, customers, suppliers, stockholders and community members;

a revised and reformed corporate law which requires corporations to be managed for the
benefit of the stakeholders and allow these groups to participate in the decision-making of
the firm given it will affect their welfare. For instance, some existing forms of law in this
area are related to product liability and labour law.

In a later paper, Freeman has taken the view that the stakeholder theory can be unpacked into
a number of stakeholder theories, each of which has a normative core. 40 The normative
core however, is not necessarily reducible to the traditional view of property rights, because
certain normative cores can be consistent with modern understandings of property rights ie, a
feminist standpoint, an ecological or pragmatic liberalism.
Indeed, Donaldson and Preston (1995) use the evolving arguments of the property rights
theory to justify the normative basis of the stakeholder theory of modern corporation.
Donaldson and Preston argue that there is concurrence of opinions on the theoretical
definition of a property as a bundle of many rights, some of which may be limited. Coase
(1960) adhered to the view that what a landowner in fact possesses is the right to carry out a
circumscribed list of actionsand his rights as a land-owner are not unlimited. 41 Authors
like Honore (1961) and Pejovich (1990) have emphasised the relationship between property
rights and human rights by noting that the right of ownership is not an unrestricted right. 42
43

The notion that property rights are embedded in human rights and that restrictions against
harmful uses are intrinsic to the property rights concept clearly signals the engagement of
groups other than the stockholder group into the property rights theory of the firm. It is
acknowledged however, that by simply bringing non-owner stakeholders into the conception
of property does not provide by itself justification for stakeholders arguments assigning
managerial responsibilities toward specific groups, ie, employees, customers. Nevertheless,
it is important that the contemporary theoretical concept of property rights does not ascribe
unlimited rights to owners and hence does not support the popular claim that the
responsibility of managers is to act solely as agent for the shareowners (Donaldson, Preston,
1995).
In a final note, it is important to refer to the managerial implications as stated in the
stakeholder theory. Accordingly, management is to play a crucial role. It must be in a
position to avoid giving primacy to one stakeholder group over another. Donaldson and
Preston (1995) support the view that managers should acknowledge the validity of diverse
stakeholder interests and should attempt to respond to them within a mutually supportive
framework, because that is a moral requirement for the legitimacy of the management
function (p87). This managerial function is associated with the firms survival which could
be in jeopardy if stakeholder interests are not in balance. As an example, when wages are too
high and product quality is too low, customers may leave, suppliers could suffer and owners
40

See Freeman R E, Business Ethics Readings and cases in corporate morality in Hoffman M W, Frederick R
E, Schwartz (2001), 4th edn.
41
Coase R H (1960), The Problem of Social Cost, Journal of Law and Economics, Vol 3, pp1-44.
42
For more information on contemporary arguments of property rights look at Donaldson and Preston (1995).
43
Honore A M (1961), Ownership, Oxford Essays in Jurisprudence, Guset A G (eds), Claverdon Press, Oxford,
pp107-147; Pejovich S (1990), The Economics of Property rights Towards a theory of comparative systems,
Kluwer Academic Publishers, Dordrecht, The Netherlands.

19

CORPORATE SOCIAL RESPONSIBILITY


could start selling stocks and bonds, depressing stock price and making it difficult to raise
capital at favourable prices (Evan, Freeman, 1988). Evan and Freeman (1988) have taken the
managerial role in the modern corporation even further by anticipating that that managers
will perform their duties better if they are elected unanimously and have no direct connection
to the firm, a view which constitutes the heart of modern corporate governance.
The shift however from the traditional shareowner orientation to a stakeholder orientation
with the implications it brings for managers is not free from criticism, particularly in light of
making it more difficult to detect self-serving behaviour by managers ie, managers may claim
that they serve some broad set of stakeholder interests while they increase their powers and
emoluments. 44
The response to this criticism has been that the conventional model of the corporation has
failed in both its legal and managerial terms to discipline self-serving behaviour. Indeed, the
latest corporate collapses of Enron and Worldcom were not detected either by the law or its
senior management. On the other hand, the stakeholder model entails comprehensive
restrictions on such behaviour simply because in its very foundation it prohibits any single
attention to the interests of any single constituency. As Donaldson and Preston (1995) argue,
the next step is to develop the legal version of the stakeholder model.
From the above discussion it becomes clear that the aim of the stakeholder theory is to
redefine the purpose of business. Whilst the conventional view is that business simply exists
to respond to signals from markets and the economic system, and therefore the purpose of
business is connected to profit-making, the stakeholder theory offers an alternative to both
business and government institutions as to what is the very purpose of a business: that is to
serve as a vehicle for coordinating stakeholder interests and to meet the claims of each of the
group of stakeholders, who are affected by corporations actions (Hoffman, Frederick 1995).
But what has promoted the attack on the old view of managerial capitalism and the rise of a
new theory in its place? Two arguments prevail: the first considers that todays corporations
no longer seem to fit the old model. In the new model, corporations can no longer accurately
be viewed as private property. Ownership separates from control, and therefore corporations
seem less like instruments of their owners and more like autonomous entities capable of their
own goals and decisions (Hoffman, Frederick 1995).
The second argument develops around power relationships between business and society. It
postulates that social power inevitably implies social responsibility, and corporations that fail
to exercise a responsibility commensurate with their power should lose that power. Society
has apparently become more aware of the external costs ie, pollution, hazardous products, job
dissatisfaction passed on to it by corporations. With these costs in mind, the basic
assumption of the traditional view of the identity of individual and social well-being is in
question (Hoffman, Frederick 1995).

44

Orts E W (1992), Beyond Shareholders Interpreting corporate constituency statutes, The George
Washington Law Review, 61, 1, pp 14-135.

20

CONSTANTINA BICHTA
Decision-making in the modern corporation
The classical view of organisations being an artificial person is also under scrutiny under the
theory of modern corporation. Instead scholars become interested in applying moral
responsibility to organisations, analogous to that which one might apply to individuals.
Goodpaster and Matthews (1982) argue that organisations can, and should be built upon the
ideas and efforts of individuals and that they should therefore be expected to hold the moral
attitudes that individuals hold. 45 Their position is based on the assumption that corporations
consist of persons that make intentional and autonomous decisions, and therefore many of the
attributes of human beings could be projected onto corporations.
In order to establish a relationship of moral responsibility in organisations analogous of that
of individuals, Goodpaster and Matthews analyse the process of moral responsibility of
individuals and apply it at the level of an organisation. Individual decision-making (or moral
responsibility) consists of rationality and respect towards others: it involves careful mapping
of alternatives, clarity about goals and purposes, attention to details of implementationand
concern for the effects of an individuals decisions and policies on others (p134). Similar,
organisations show the same kind of rationality and respect that individuals show whilst
making decisions. Some corporations have built features into their management incentive
systems, board structures, internal control systems, and research agendas that in a person we
would call self-control, integrity, and conscientiousness (p135). Some others also pay
attention to the human impact of their operations and policies and reject practices that might
create controversy (p136). Thus this moral responsibility that exists among individuals also
exists among organisations in the form of corporate conscience. 46
Having rejected the view that organisations are artificial persons, scholars attribute the level
of weight to both managerial vales and managerial discretion as promoters of socially
responsible actions.
In organisational (strategic) decision-making, managerial values have a crucial role to play.
Freeman and Gilbert (1988) stress that all actions taken by organisations and their constituent
members are underpinned by the values held by those individuals and groups (values
principle). 47 Any actions taken by them will involve decisions or choices, which in turn will
be affected by the dominant value system (interdependence principle). Therefore the process
of strategic management must take account of the values held by members of organisations
and other stakeholders in policy formulation and implementation.48 Consequently, Freeman
and Gilbert argue (1988) that:
corporate strategy which ignores the role of people in the organisation
simply ignores why organisational members act in the way they do. Corporate
strategy must return to the individual values of corporate members, before it is
formulated. It must be built on these values rather than taking them as
constraining forces. (p11)
45

Goodpaster K E, Matthews Jr J B (1982), Can a Corporation Have a Conscience?, Harvard Business Review,
Vol 60, No 1, January-February, pp132-141.
46
Between the options of the invisible hand, government intervention and management as mediators that
ensure corporate moral behaviour, Goodpaster and Matthews are in favour of the management option. This is
because the other two notions fail to locate the source of corporate responsible behaviour in the corporation
itself and rely instead on external systems and forces of the corporation.
47
Freeman R E, Gilbert D R (1988), Corporate Strategy and the Search for Ethics, Prentice-Hall, New York.
48
Smith D (1993), (eds) Business and the Environment, Chapman Publishing Ltd, London.

21

CORPORATE SOCIAL RESPONSIBILITY


The degree of managerial discretion is important also in a companys socially responsible
activities. Ackerman (1975) writes that corporate social responsibility is at the discretion of
managerial actions and choices. 49 Carroll (1979) pursues the belief that managers are moral
actors who are obliged to exercise the discretion that is available to them within the domain
of corporate social responsibility. 50 Wood (1991) also claims that managers have the
opportunity to express discretion in almost every domain of social responsibility through
applying their own morality to these decisions. 51 The principle implies that because
managers possess discretion, they are responsible for exercising it, and cannot avoid this
responsibility by referring to rules, policies and procedures (Wood, 1991, p699).
These views are important contributions to corporate social responsibility as they facilitate a
new understanding of the managerial role according to which managers pursue the
organisational goals but organisations also provide space for managers to define their own
purpose and behaviour (Roome, 1997).

Corporate legitimacy
Corporate legitimacy is another central theme of the theory of modern corporation. Grolin
(1998) offers an interesting account of three competing models of corporate legitimacy, the
classical model, the stakeholder model and the political corporation model. Friedmans
approach is defined as the classical model of corporate legitimacy because it concentrates on
the economic functions of the corporation. 52 The stakeholder model described earlier
comprises the second model of corporate legitimacy as it requires companies to be responsive
to those in society, immediately affected, in a tangible way by corporate decisions and
actions.
The political corporation model reflects an increasing globalisation of the economy and a
parallel weakening of national government authority, and it goes beyond the two other
models by advocating that a corporation should adopt a clear set of moral and ethical
values, which relate to the general public both globally and locally, and which can guide
corporate actions irrespective of whether [the corporation] is explicitly required by law
(p217). Grolin has based his argument of the political corporation model on the Brent Spar
conflict to suggest that companies are likely to acquire their legitimacy directly from the
public. In the period of the conflict, Shell was unable to solve the problem relating to the
disposal of its oil storage platform through the involvement of the (British) government. Shell
instead experienced a consumer boycott across the northern countries. The Brent Spar
conflict suggests a clash between the reductionist rationality of the scientific expert and the
common-sense rationality of the lay public (p219). It also marks a change in the location of
the driving forces of politics from formal political institutions to groups and individuals of
civil society (p219). Based on the weakness of political institutions and of science to
establish the legitimacy of organisational activity, in the future corporations are likely to be
held accountable by the public for legitimate activities (Bichta, 2000).

49

Ackerman R W (1975), The Social Challenge to Business, Harvard University Press, Cambridge MA.
Carroll A B (1979), A Three-Dimensional Conceptual Model of Corporate Social Performance, Academy of
Management Review, Vol 4, pp497-505.
51
Wood D J (1991), Corporate Social Performance Revisited, Academy of Management Review, Vol 16, No 4,
pp691-718.
52
Grolin J (1998), Corporate Legitimacy in Risk Society - The case of Brent Spar, Business Strategy and the
Environment, Vol 7, pp213-22.
50

22

CONSTANTINA BICHTA
Corporate governance
The governance of a corporation is defined by Cannon (1994) as the sum of those activities
which make up the internal regulation of the business in compliance with the obligations
placed on the firm by legislation, ownership and control. As the same author explains,
changes in industrial structures, shifts in economic relationships and the interaction between
business and the community are forcing society and firms to review the ways in which
organisations are governed.
In particular, since the early 1980s the different groups of stakeholders have challenged the
conventional view of governance. The case for corporate governance has been largely
influenced by the corporate collapses which occurred in the United States and Britain due to
fraud or mismanagement since the 1980s. Public anxiety about local and national economic
decline, shareholder disappointment at poor financial returns and declining asset values
provoked newspaper headlines and demands by politicians for reform of a companys
governance with the threat of legislative action if change was delayed (Cannon, 1994). The
growing importance attached to re-appraising the governance of modern businesses was also
in response to public concern about the large remuneration packages offered to senior
managers, often without the approval of shareholders. Managerial capitalism is seen to
benefit executives at the expense of owners even if the firm is performing poorly (Cannon,
1994).
So what are the objectives of corporate governance of the modern corporation? It first
reassesses the relationship between the notions of ownership and control by separating them.
The disappointing performance of many firms in late 1980s and 1990s prompted investors to
search for ways of exerting more direct pressure on the firm and its management. This
interventionist approach adopted by investors groups in the United States stands particularly
in contrast with non-interventionist traditions preferred in Britain. By 1991, twenty nine
states in the US had adopted statutes, which specified that boards of directors have a right to
consider the interests of non-shareholder, stakeholders, in board decision-making.
Corporate governance reappraises the behaviour of directors. Statutory responsibilities
regulate the activities of companies and their directors. It is argued, however, that law and
regulation may offer protection against abuse of power but cannot affectively deal with the
use of authority and opportunity. Thus, corporate governance concentrates its focus on
supporting a stronger policing role for non-executive directors, separating the roles of
chairman and chief executive and advocating transparency in internal dealings ie, directors
pay (Cannon, 1994).
Corporate governance also reassesses the role, relationship and reporting procedure of
directors in relation to the auditing of the company. 53 Finally, it promotes the issues of
disclosure and transparency on the issue of executive remuneration.
Since the early 1990s a number of committees have been set up to make recommendations on
the new forms of corporate governance. The results of the committees work have been
published in reports tackling issues on accountability, disclosure and monitoring procedures.
The Harvard Business Review set up a working group on corporate governance in 1990. The
53

The audit of a company is the consolidated statement of accounts including the balance sheet, trading and
profit and loss account examined by a qualified auditor and assessed as to whether these financial statements
provide a true and fair account and comply with legal requirements (Cannon, 1994).

23

CORPORATE SOCIAL RESPONSIBILITY


group was involved in exploring investors rights and management accountability, the roles
of executive and non-executive directors in both monitoring management performance and
representing shareholders interests, and matters relating to remuneration and the conditions
of employment agreed with managers. The groups findings were published as a new
compact for owners and directors. In Britain, the Cadbury Committee (1992) was set up and
produced specific proposals for change in the pattern of corporate governance. The
committees deliberations suggested the strengthening of the role of the audit committee, the
development of a contributory role of independent directors on the committee and the
strengthening of their role in the firm. The Cadbury committee recommended that it should
be the responsibility of the audit committee to discuss the audit with the auditor and approve
the company accounts. 54
In 1998, the Organisation for Economic Cooperation and Development (OECD) developed a
set of corporate governance standards and guidelines addressing five key areas of corporate
governance namely protecting the rights of shareholders; the equitable treatment of all
shareholders; the role of stakeholders in corporate governance; the need for timely and
accurate disclosure and transparency and strategic guidance on the responsibilities of the
board. The principles are intended to provide guidance in the development of good corporate
governance for companies and other organisations and assist national government to evaluate
and improve corporate governance. 55

The role of government


In the theory of the modern corporation it is argued that the government has a potential role
to play towards promoting and enhancing corporate social responsibility.
Reich (1998) argues that the government should act as arbiter of business responsibility in
society. 56 The importance for society of relying on the good will and responsibility of
executives rather than political forces is recognised. The argument, however, is that
sometimes political decisions may be required to answer major questions ie, corporate
social responsibility issues. This is because CSR issues also fall in the arena of public policy
which is the primary government task. For instance, the question should profitable
companies lay off redundant employees rather than redeploy them or retain them for new jobs
is a matter of corporate (ethics) policy as well as an issue of public policy given that layoffs
can impose substantial costs on former employees, their families and communities. It is
suggested that a role for government in that matter may be to help firms internalise the social
costs of layoffs, without causing large inefficiencies, by raising the unemployment-insurance
premiums on profitable companies that engage in them and cutting premiums in companies
they don not. Alternatively, if the society wants companies to take on the responsibility of
finding new jobs for employees who are no longer needed, government could offer these
companies tax deductions or credits. Generally speaking, the government can be an arbiter of
business responsibility to society through the application of tax incentives or tax credits.
Government can also exercise the arbiter role through regulation and the setting of minimum
standards to help society overcome free-rider problems. Where firms could benefit if all
54

Cadbury A (1992), Report of the Committee on the Financial Aspects of Corporate Governance, Gee,
London.
55
Corporate Culture and Good Corporation (2002), Profiles of Codes and Frameworks, London.
56
Reich R B (1998), The New Meaning of Corporate Social Responsibility, California Management Review,
Vol 40, No 2, pp8-17.

24

CONSTANTINA BICHTA
trained their employees in skills applicable to entire industry or beyond, but no company
would do training unless others did it as well, the government can impose a requirement that
all firms contribute a small percentage of their payrolls to non-firm specific training, or
provide tax incentives for employee training in general (Reich, 1998).
This view of government as arbiter of business responsibilities to society is reinforced by
another argument that sees government as helping business to achieve corporate social
responsibility though regulation, control and enforcement. This view is driven from
experience in Scandinavia countries where the control/enforcement model is used to
eliminate the problem of cost externalisation.57
Five possible ways/models of avoiding cost externalisation are identified:

deregulation model: deregulation and viewing the company responsibility as directed


towards the shareholders only;
corporatist model: providing management with more discretion to take non-profit goals
into account;
control of management by an independent body: giving shareholders only an economic
right but no voting right in the company and setting an independent body to control
management;
non-shareholder interests representatives model: putting representatives for various nonshareholder interests on the companys board;
regulation and control/enforcement model: more regulation and control.

The regulation and control/enforcement model has met with great acceptance in the
Scandinavian countries, mostly because Scandinavian countries are so-called welfare states
and the state intervenes in all aspects of life including issues of the economy. Broberg (1996)
argues that Scandinavians accept that in the past government successfully controlled
externalities regarding the environment, safety at work and competition provisions. This
explains why Scandinavian management currently adheres more to the regulation and
control/enforcement model rather than to the deregulation model suggested by Friedman or
the corporatist model and the theory of managerialism. Management in Scandinavia is very
much bound by legal restrictions. The success, however, of the regulation and
control/enforcement model in Scandinavia is attributed to a very detailed and well-enforced
legislation in comparison with other European member states.
The model of non-shareholder interests representatives is also extensively used in
Scandinavia with particular emphasis on employee representation. This model is also
imposed by state regulation and necessitates the representation of employees, the local
community, consumers and the environment, in the firms meetings. Broberg (1996) expects
that the membership of Scandinavian countries in the European Union will increase the
enforcement of regulation and control as well as the representation of non-shareholder
interests across the European industrial sector. Denmark, Sweden, the Netherlands, Austria,
and Luxembourg are also examples of countries in which the representation of employees on
company boards is required by law.

57

Broberg M P (1996), Corporate Social Responsibility in the European CommunitiesThe Scandinavian View,
Journal of Business Ethics, Vol 15, pp615-622.

25

CORPORATE SOCIAL RESPONSIBILITY

Contrasting models of the corporation - a schematic overview


The discussion around the conventional model and the stakeholder model of the corporation
prompts the development of two contrasting models of the corporation (Donaldson, Preston,
1995).
The conventional model, called by Donaldson and Preston (1995), input-output model of the
corporation postulates that contributing inputs in a firm will be transformed into beneficial
outputs for customers.
Figure 1: Input-output model of the firm

investors

suppliers

FIRM

customers

employees

In Figure 1, investors, employees and suppliers are portrayed as contributing inputs, which
the black box of the firm transforms into outputs for the benefit of customers. Each
contributor of inputs expects to receive appropriate compensation. According to Adam
Smith, or liberal economists, in the long-run equilibrium input contributors, at the margin,
receive only normal or market competitive benefits ie, the benefits they would obtain from
some alternative use of their resources and time. As a result of competition throughout the
system, the bulk of the benefits will go to the customers (Donaldson, Preston, 1995, p68). 58
Figure 2 represents the stakeholder model of the corporation which contrasts with the inputoutput model of the firm in all its variations.

58

The Marxist-capitalist version of this model reverses the customers and investors arrows in order to produce
gains for the investors ((Donaldson, Preston, 1995).

26

CONSTANTINA BICHTA
Figure 2: The stakeholder model of the firm

political
groups

governments

investors

suppliers

FIRM

customers

employees

communities

trade
associations

According to the stakeholder model, all persons or groups with legitimate interests
participating in an enterprises do so to obtain benefits and there is no prima facie priority of
one set of interests and benefits over another (Donaldson, Preston, 1995, p68). Therefore,
the arrows between the firm and its stakeholder constituents run in both directions.
As the authors Donaldson and Preston note (1995), the extent to which the stakeholder theory
is understood to represent a challenging approach to conventional views varies greatly among
market capitalist economies:
In America, for instance, shareholders have a comparatively big say in the
running of the enterprises they own; workers have much less influence. In
many European countries, shareholders have less say and workers more. In
Japan, managers have been left alone to run their companies as they see fit,
namely for the benefit of employees and of allied companies, as much as for
shareholders The Economist, 1993, p52. 59
Nevertheless, the stakeholder model of the corporation is developed around theoretical
concepts ie, the meaning of property rights which are critical to the understanding of the
purpose and role of corporations in society.

Business ethics
In the concluding part of the theoretical debates surrounding corporate social responsibility a
reference to the concept of business ethics will also be made. This is because the concepts of
business ethics and corporate social responsibility are very often confused. Also, it has been
suggested that the three subjects, corporate social responsibility, business ethics and
corporate governance should be integrated as a single academic domain (McEwan, 2001).
Since it is outside the scope of this paper to address the relationship between the three

59

In Donaldson, Preston, 1995, p69.

27

CORPORATE SOCIAL RESPONSIBILITY


concepts, the scope of business ethics and its relationship to corporate social responsibility
are only discussed here.
In the academic literature, often the two concepts, business ethics and corporate social
responsibility are used interchangeably and others in their own right. Also in the academic
literature, there is no concurrence of opinions about which concept supersedes the other: for
instance, in some cases, business ethics is considered part of corporate social responsibility,
whereas in other cases corporate social responsibility is thought to be just one aspect of
business ethics (Hoffman, Frederick, 1995). So, is there any relationship between the two
academic disciplines?
Ethics is defined as the study of what is good or right for human beings (Hoffman, Frederick,
Schwartz, 2001). Ethics are concerned with the goals that people ought to pursue and the
actions they ought to perform. Ethics is a normative science where questions of what ought
to be done or what ought not to be done are posed. 60 Business ethics therefore may be
seen as a normative science that pursues the study of what is good and right in terms of
business operations within society.
In terms of a relationship between business ethics and corporate social responsibility, there is
substantial evidence to suggest an interrelationship between the two disciplines, particularly
in defining business operability within society.
Similar to the notion of corporate social responsibility, a number of social events during the
1960s, including civil rights, protection of the natural environment, safety at work and
consumerism stimulated the public interest for ethical activities in business. During the
1970s the public belief that business lacked social responsibility was reflected in the media.
The response of academic institutions to public protest was the introduction of business ethics
courses into their curricula (Bichta, 2000). Most US schools offered a course in business
ethics by 1980. By offering courses in business ethics, its development into a recognised
academic discipline was preceded. 61 From 1980 to 1985 the business ethics field continued
to consolidate with journals, research centres and conferences taking place. From 1985 to
1995 business ethics was integrated into large corporations in the form of codes of ethics,
ethical training programmes and the appointment of ethics officers. Since 1995, issues
related to international business activity like bribery and corruption, child labour and abuse
have been included in the business ethics agenda.
It is clear that the radical social changes during the 1960s and 1970s that prompted the public
concern for corporate social responsibility have also elevated the public interest for ethical
activities in business operations. So is business ethics part of corporate social responsibility,
is corporate social responsibility just one aspect of business ethics or have the two disciplines

60

Ethics deals with certain norms and values. Norms are seen as being collective expectations regarding a
certain type of behaviour whereas, values are collective representations of what constitutes good life within
any given society in Van Luijk H (1994), Business Ethics - The field and its importance, Business Ethics -A
European approach, Harvey B (eds), Prentice-Hall, New York, pp12-31.
61
Shaw W (1996), Business Ethics Today - A survey, Journal of Business Ethics, Vol 15, pp489-500.

28

CONSTANTINA BICHTA
developed alongside? 62 A possible answer to this question may lie with the manner in which
the two concepts have been operationalised by business itself.
Business people find it very difficult to apply any ethical terms, as we use them, on their
activities. In contrast, they prefer to argue that the market itself has moral values embedded
in it, and that business operates according to those values. 63 Since the emergence of the
notions of business ethics and corporate social responsibility in the 1970s, business people
have centred their discussion mostly on areas that are related to their operations and image.
The notions of corporate responsibility, corporate responsiveness, and public policy are the
preferred business terms when referring to social policy activities. The notion of social
responsibility represents the first initial concern of business with regard to moral behaviour
and activity (Bichta, 2000).
Beyond the observation however that the impact of specific social changes resulted into the
emergence of new ideologies such as business ethics and corporate social responsibility, an
interrelationship between the two can be explained in the underpinning principle of their
central argument, which is normative. If one accepts that the normative principle serves as
the underpinning basis of corporate social responsibility, then corporate social responsibility
is related to business ethics as the latter is a normative science which uses deontological
ethics to investigate the importance given to human priorities over and above the utilitarian
business imperatives of profit making, competition and growth.
Having presented the academic view of the emergence of the notion of corporate social
responsibility, the next section turns its focus on the political perspective of responsible
business behaviour within society.

62

If one takes the view that corporate social responsibility is concerned with the proper role of obligations of
corporations within society (normative), it could be argued that the concept of business ethics embraces that of
corporate social responsibility as business ethics concerns the study of the relationship of what is good and right
for business. McEwan (2001) takes the view that the concepts of business ethics, corporate social responsibility
and corporate governance should be integrated as a single academic domain. Harvey (1994) distinguishes the
two terms because corporate social responsibility is concerned with the debate about the social role of,
especially, large business enterprises and business ethics with the raised profile in the public mind of business
behaviour and the responsibilities of the corporation- in effect to questions of right and wrong.
63
Harvey B (ed)(1994), Business Ethics, Redwood Books, Great Britain.

29

CORPORATE SOCIAL RESPONSIBILITY

30

CONSTANTINA BICHTA

4 THE POLITICAL VIEW - PROPOSALS


AND POLICIES
This section discusses the political view, the view of government in relation to CSR. Given
the emergence of CSR in the political agendas of the UK government and the European
Union, it is appropriate to present the view that the British government has taken historically
in relation to CSR and the approach that the European Union currently tries to promote in
relation to CSR.
A government role on CSR is worth examining given the size of the corporate sector in
Britain. There are approximately 1.5m companies registered on the Companies House
register, of which around 15,000 are public companies. Of those, about 2,700 are listed or
quoted public companies. The vast majority of companies are private and around ninety
eight per cent of these have five or fewer shareholders. In total, in Britain, companies
activities constitute almost eighty per cent of the countrys economic activity measured by
turnover. Companies also provide 60% of all employment.
In Britain, a mixture of legislation, regulation and voluntarism has provided the framework
for defining the rights and responsibilities of the firm. Legislation centres mostly around the
Companies Act, regulation is enforced by agencies such as the Securities and Investments
Board and voluntarism is expressed through codes developed by the industry and under
government encouragement like the City Code of Take Overs and Mergers and many others.
As regards the companys constitution, shareholders have shares in the nominal capital of the
company and this entitles them to a proportion of the distributed profits of the company.
Directors are responsible for the good governance of the company. The obligations of
directors are spelt out in legislation or defined by precedent. Traditionally, a directors
liabilities for damages are unlimited but the current trend in UK law, as it will be discussed
later, is towards extending the personal liability exposure of executive and non-executive
directors of the firm. The company directors act in concert through the board of directors
(Cannon, 1994). The following section offers a detailed description and analysis of the
development of the legal company framework in Britain. 64

Corporate law and governance in Britain - a historical review


Early days
Company law governs how companies are formed and run.65 Historically in Britain company
law has been in favour of a private association of the company. This has implied that
company law has been primarily concerned with the fiduciary duties of company directors to
their shareholders and an obligation imposed on companies to disclose financial information
and hold meetings with their shareholders. British company law is in favour of the
shareholders and managers to decide procedures for making decisions. Donnelly et al (2000)
64

The section on company law and governance in Britain is mostly based on information derived from The
Public Interest and the Company in Britain and Germany Report funded by the Anglo-German Foundation.
See Donnelly S, Gamble A, Jackson G, Parkinson J (2000), The Public Interest and the Company in Britain and
Germany, Project funded by the Anglo-German Foundation 1998-1999, June.
65
www.dti.gov.uk.

31

CORPORATE SOCIAL RESPONSIBILITY


explain that UK company law also reflects, to a large degree, the public interest in relation to
the company function. This interest has been mainly concerned with profit maximisation, the
protection of small private investors and limited state intervention to particular forms of
company structure and governance.
In the UK company law, state intervention has been mostly associated, or at least until
recently, with protection of minority shareholder rights and the setting up of market rules,
such as accounting and reporting rules. British company law treats employee issues, impact
of corporate activities on the local community and the natural environment as matters
external to the company. As an example, employee interests have been traditionally
protected through collective bargaining and legislation. Any other omissions of the British
company law have been addressed by voluntary codes of conduct introduced during the
1980s and 1990s and voluntary efforts of shareholders.
Also, groups connected with, or affected by, company activities have traditionally been
regarded as outside the company. If their interests needed to be protected by statutory
intervention this would be by regulation external to company law, applying to all forms of
business, whether companies or not, and consisting of finite constraints on the business
operations rather than acquiring a reassessment of the companys goals (Donnelly et al,
2000).
This view of company law persisted during the Victorian era. In the Victorian times, it was
believed that the company members were the best judges of their own interests and the role of
law should be facilitative, to give binding effect to the business arrangements they wanted to
adopt. Clearly this view of company law was derived from property rights arguments
which resist intrusion into the operations of a company.
In the nineteenth century and for two thirds of the twentieth century the laissez-faire principle
dominated business transactions in Britain. Until the early nineteenth century UK companies
were family owned or owned by individuals. However, from 1855 onwards limited liability
became available in order to provide security to small investors participating in new
industries. 66 By being primarily concerned with the rights of shareholders and the
possibilities that limited liability opened up for enterprise and managerial autonomy, the
laissez fair principle left no room for state intervention in private commercial relationships.
Consequently, corporate property was treated by corporate law as private individual property.
Key areas of governance were left almost entirely to private ordering ie, the structure and
composition of the board. It was the 1948 Companies Act that enforced the right of
shareholders to remove the companys directors, if they decided so, by simply voting
majority. The presence of independent directors who could perform strategic and
monitoring roles did not begin to take shape until the 1970s. For almost two centuries
legislation required companies to have directors but it did not set out their functions, nor
recognised a distinction between executive and non-executive directors. Government passed
a financial disclosure regime that was imposed in stages over many pieces of legislation with
the objective to protect outside shareholders, mainly through publicity, from dishonest and
incompetent managers, and to increase confidence in equity markets and thereby facilitate
the flow of finance to industry (Donnelly et al, 2000, p24).

66

Until 1845, UK companies traded with unlimited liability, which meant that individual owners took full
responsibility for all their actions.

32

CONSTANTINA BICHTA
The laissez-faire principle also left no room for labour representation into the governance
structure of firms in Britain. 67 Instead, formation of unions was repressed under criminal
law: the Master and Servant Act in conjunction with the 1825 Combination Act made it a
crime to conspire to act collectively for issues involving working conditions or pay rise. 68
During the first world war the government introduced for the first time an agenda of
employer-labour consultation conducted by industry on a purely voluntary basis. 69 With the
end of the second world war, the Labour party sought to secure public interest through public
ownership, legislation in monopolies and mergers, and legal support for trade unionism rather
than structural changes to the company. The government initiated the set up of three
committees towards reviewing the UK company law: the 1945 Cohen Committee, the 1962
Jenkins Committee and the 1977 Bullock Committee. None of these committees however
succeeded in making a real change in British company law for reasons explained below.
According to Donnelly et al (2000), the recommendations of the first two committees were
not taken forward mainly because of disputes between the labour party and the Trade Union
Congress (TUC) that suppressed corporate governance in favour of a public ownership
agenda. The 1977 Bullock Committee recommended a change to the fiduciary duties of
boards of directors of public sector companies to reflect the importance of employee
interests. The Confederation of British Industry (CBI), despite the support given by the TUC,
dismissed this recommendation. Furthermore, the conservative governments between 1979
and 1997 brought in new laws to curb the powers of trade unions and promoted restrictions
on industrial action on the grounds of individual rights to enter into contracts unimpeded by
third parties. The governments of Margaret Thatcher and John Major saw public interest in
respect of shareholder value and firms acting without interference from unions and the state.
Their governments assumed that well managed companies would pay proper attention to the
needs of their employees.
Thus, for the first two thirds of the twentieth century, British industrial relations were
characterised by a high level of voluntarism and a minimum of formal legislation. Both sides
of industry preferred collective bargaining to be free and voluntarist, and there was
resistance to legal framework for industrial relations which was common in other European
countries like Germany, and which would have embraced the role for labour in the
company. 70

67

In this period, working class demands on both the political and economic systems were met trough a
combination of political participation through extension of the franchise, early incorporation of working class
issues into the political system through the Liberal Party and through court-sanctioned repression (after the
passing of the 1906 Disputes Act).
68
The Trade Disputes Act stopped the repression of worker associations.
69
The 1919 New Ministries and Secretaries Act gave the minister of labour the responsibility to promote the
formation of conciliation councils and joint industrial councils with the intention of bringing together unions and
management of the firm. Due to the voluntary character of the act only 20 councils survived by the start of the
second world war. The 1919 Industrial Courts Act provided for a court settlement of disputes between labour
and employer but it also remained voluntary.
70
As far as the British trade union movement was concerned there was a sharp divide between the interests of
capital and of labour, and good industrial relations depended on keeping that distinction clear. This enabled
trade union negotiators acting for organised labour to get the best possible deal from the capital owners. The
relationship however between company and labour was heavily criticised by those who wanted to see organised
labour to be fully incorporated into economic institutions and more directly involved in the formulation and
implementation of the public interest (Donnelly et al, 2000).

33

CORPORATE SOCIAL RESPONSIBILITY


Company law in the 1970s-1980s
The relationship between company and labour went under change in the 1970s and the
following years due to trends in global economic and EU polices. Donnelly et al (2000) list
three factors inspiring change in company structure and governance in Britain:

Internationalisation: Capital mobility at the international level has placed national


financial systems under growing competitive pressure to provide comparable risks and
returns. Regulatory regimes face pressures from market actors and intergovernmental
institutions to make corporate governance systems transparent and open to market
actors.

European Integration: Since 1968, the European commission has formulated a series of
company directives. As a result of the 1985 Single European Act 1985, the favourite EU
approach is the recognition of national law under the principle of subsidiary rather than
harmonisation under a supranational structure. Company directives have been passed on
to ensure that shareholders across the EU have access to sufficient and reliable
information on companies. The objective of the strategy is to ensure that all EU states
impose the same regulatory or structural requirements on companies, thereby levelling the
competitive playing field.

Post industrial concerns: Concerns over the companys role in community affairs have
been increasingly formalised. Environmental issues, equal job opportunities for females
and ethic minorities are central topics of discussion in post-industrial society.

During the 1970s and 1980s, a string of codes and legislation was passed on in an attempt to
alter the relationship between firm and some of its constituents ie, investors, employees and
the natural environment. In the 1970s, the Bank of England initiated a movement to
encourage boards to appoint people who were independent of them with the task of
performing a monitoring role. During the 1970s and 1980s, the initiatives of the Bank of
England were boosted by CBI initiatives to improve board structure and performance
following a series of financial scandals, which ultimately led to the formalisation of Cadbury
Code in the nineties.
In the 1970s the government imposed legal standards on issues of health and safety at work
and minimum standards on equal opportunity and environmental protection issues.
The 1974 Health and Safety at Work Act changed British corporate governance in respect of
health and safety protection regulations at the workplace. For the first time, employers had a
responsibility to prevent accidents causing harm at work, rather than merely being liable to
pay damages. The act established the Health and Safety Executive (HSE) to advise the
government on detailed regulations and inform business on compliance. 71 The act also
provided for employee participation through safety representatives in company meetings, but
did not mandate them. Further regulations were passed in 1977 which allowed recognised
trade unions to appoint safety representatives to participate on company committees (Barrett,
Howells, 1995).

71

Barrett B, Howells R (1995), Occupational Health and Safety Law, Pitman, London.

34

CONSTANTINA BICHTA
The 1970s Equal Pay Act made it illegal to offer men and women different pay of conditions
for the same type of work. The 1983 Equal Pay Regulations extended the provisions of the
act to work of equal value. The 1975 Sex Discrimination Act broadened the prohibition on
discrimination to cover employment and business transactions. However, as Donnelly et al
(2000) testify, business succeeded in wining exemptions particularly in cases where sex
could be deemed a genuine occupational qualification for the job.
The Sex Discrimination Act outlawed sexual harassment and held employers responsible for
the actions of their employees in some cases. It required companies to develop an internal
policy on harassment, including grievance procedures and counter measures to protect
themselves from liability in the event of a complaint. Nevertheless, the 1994 Criminal Justice
and Public Order Act opened up the possibility that sexual harassment could be treated as a
criminal offence.
The Race Relations Act was passed in 1976 to tackle direct and indirect discrimination on the
basis of racial, ethnic or national origins. 72 Similar to the Sex Discrimination Act, the Race
Relations Act applies to all employers, with a few notable exceptions, in which race is
deemed a genuine occupational qualification. 73
The equal opportunities commission (EOC) and the commission for racial equality were the
bodies established by government to investigate complaints on suspected unequal
opportunities or discrimination cases. The EOC also administer a code of practice on equal
pay whereas the commission for racial equality has an agent role to improve employers
attitudes towards discrimination. 74
Protecting the environment became a matter for external regulation affecting companies in
the Town and Country Planning Act 1948, which required local authority clearance for
certain types of new developments and installations. Until 1990, new versions of the act did
not interfere with the internal operations or structure of companies, but simply extended the
scope of application. 75
A series of financial scandals that unfolded in the 1970s suggested that providing adequate
safeguards for non-managerial shareholders could not be left solely to private ordering.
Companies Acts were passed to impose a regime of mandatory financial disclosure. Thus,
during the eighties further legislation and codes of conduct were introduced to cover the
obligations of the firm and company directors such as the Company Securities Act 1985, the
Companies Act 1985, the Model Code for Securities Transactions by Directors of listed
Companies and the City Code on Takeovers and Mergers.
72

The act required that complaints be handled through industrial tribunals in case of disputes at the workplace.
At present, this means acting jobs, but also working in cafes and restaurants and delivering personal social
services to a particular racial group. The Race Relations Act also forbids affirmative action programmes or
measures aimed directly at hiring or promotion.
74
In 1998, the Commission lobbied parliament to adopt EU directives to bring the treatment of racial
discrimination in line with that for sexual discrimination. This was due to reported cases where the Race
Relations Act had been ineffective among British firms. The Commission also sought greater powers for itself
to monitor discrimination and initiate prosecution, and to impose on public and private managers a duty to
combat discrimination.
75
Even the 1988 Town and Country Planning Regulations, which implemented EEC Directive 85/337
mandating environmental assessments of installations, only served to widen the scope of operations subject to
mandatory requests for assessments. They obliged companies to assess the environmental effects of proposed
new developments on natural resources, all forms of life, the landscape, climate and the areas cultural heritage,
and to suggest means of mitigating the impact (Donnelly et al, 2000).
73

35

CORPORATE SOCIAL RESPONSIBILITY


The Companies Act 1985 required full, complete and early disclosure by directors of
information on dealings and shares. One of the central notions of the act is the notion of
interest. The act requires directors to disclose all their interests in the firm including the
interests of close family members ie, spouse or infant children. Further to the directors
obligations, the 1985 Companies Act encouraged accountants to establish a standards-setting
body that would provide some consistency to company accounts, and directors and auditors
reports. In the absence of such a body however, the 1989 Companies Act mandated an
accounting standards board to regulate accounting association standards, company auditor
qualifications and their practices in compliance with the ECs eight company law directive
(84/253). The 1985 Companies Act also gave the Department of Trade and Industry (DTI)
powers to ensure that all the provisions of the act were complied with (Cannon, 1994). It has
to be said, however, that regulation passed in the 1980s - the Companies Act - may be
targeted at preventing improper conduct and negligence of company directors but once again
it avoided setting out the governance functions of company directors. It was left to the
company and its associates to set up codes of contact as a response to scandals and
inappropriate behaviour of board members.
During the 1990s company law in Britain is characterised by a combination of industry
voluntary initiatives and binding legislation.

Company law in the 1990s


In response to financial scandals and in an attempt to pre-empt formal regulation, the
corporate and investment communities in Britain developed their own codes of best practice.
The Cadbury committee produced the first code of best practice in 1992, whose provisions
could be adopted on voluntarily basis. The major objective of the code is the appointment of
non-executive directors (NEDs), the setting up of remuneration procedures and audit controls
to make governance arrangements transparent and empower shareholders to pressurise
management through the market or any other means, when they believe that improvements
are needed.
In 1995, the Cadbury code was followed by the study group on directors remuneration, the
Greenbury committee. The committee was established in response to public disapproval of
the scale of directors remuneration in privatised utilities, given that directors were paid much
more than they were before privatisation for arguably carrying out much the same role. The
main recommendations of the Greenbury committee were that a remuneration committee,
comprised entirely by independent NEDs, should set directors pay and other conditions. The
1998 Hampel committee on corporate governance was a private sector initiative with
government support, set up to review the operations of the Cadbury code and look at the
shareholder role in corporate governance. The committee concluded that the monitoring
procedures laid out in the Cadbury code ought to be the strengthened. The three codes have
been combined in what is known as the combined code (committee on corporate governance,
1998). The 1998 combined code requires companies listed on the stock exchange to have at
least one third of NEDs on the board, a majority of whom must be independent of
management. It also requires companies to identify their NEDs in their annual report.
Together with industry initiatives, binding legislation determining the obligations of the firm
in relation to employees, equal opportunities and protection of the natural environment has
been extended in the UK during the 1990s. The UK membership in the EU has played, if not
the primary, certainly a decisive role. The process, however, of shifting from a liberal market
36

CONSTANTINA BICHTA
model to a model of external regulation has not been an easy one. For instance, the UK had
difficulties in implementing the 85/337/EEC directive on environmental impact assessment
(Bichta, 2000). As far as Britain was concerned the directive should not be applied to
projects that had entered the initial stages of the planning process prior the point in time at
which the directive come into force. 76 Moreover, the British considered themselves to be
more environmentally aware than other European countries and refused to accept the
interference of the European commission (Haigh, Lanigan, 1995). Nevertheless, the EU
membership and a revived Labour party have brought changes in the UK corporate
governance since the 1990s.
A priority for the newly elected government in 1997 was to introduce a legal framework for
industrial relations that would bring Britain closer into line with other EU member states.
The Blair government signed the social chapter of the Maastricht Treaty which proposed
social rights to be applied across all members states. The government introduced a minimum
wage and, after consultation, it published its proposals on industrial relations in the white
paper - Fairness at Work. 77 The government gave significant new rights to both individual
workers and trade unions, including setting out conditions under which firms must agree to
trade union representation. 78
Like its predecessors, however, the new Labour government opposed any further radical
suggestions from the EU making it obligatory for companies to establish works councils or to
provide major statutory improvements to working conditions, such as the length of the
working day. The Labour government chose an enlightened shareholder value model of the
company and it was prepared to legislate to ensure that minimum standards and rights were
protected. But clearly it did not favour a more proactive stance (Donnelly et al, 2000). These
government tactics were according to the plan to keep legal constraints on companies to a
minimum as they could reduce flexibility and significantly increase costs. Having said that,
the Labour government introduced legislation in respect of trade unions and employment
issues to ensure that organised labour and employee rights would be represented in the
workplace.
The 1992 Management of Health and Safety at Work regulations built on the principles of the
1974 Health and Safety at Work Act and implemented the 1989 EC directives, to ensure
company responsibility for safety in the workplace. The regulations went further in that they
obligated employers to train employees and appoint safety officers for the first time. The
regulations are given further substance by the approved code of practice for the management
of health and safety at work, issued by the HSE. Failure to comply with the code is not an
offence, but employers who violate it may be held accountable to its standards as a criminal
violation under the 1992 regulations or the 1974 act. Donnelly et al (2000) explain that the
employer is now given the responsibility to assess risks and hazards to health and safety in
the workplace, to prevent and minimise risks, to inform and train employees and to monitor
their health during working hours while taking advantage of new technology. 79

76

Haigh N, Lanigan C (1995), Impact of the European Union on UK Environmental Policy Making, UK
Environmental Policy in the 1990s, Gray T S (ed), Macmillan Press Ltd, Great Britain, pp18-37.
77
Department of Trade and Industry (1998), Fairness at Work, 21 May, Cm 3968.
78
Gamble A, Kelly G (2000), The Politics of the Company, The Political Economy of the Company, Parkinson
J, Gamble A and Kelly G (eds), Hart, London.
79
Health and Safety Commission (1992), Management of Health and Safety at Work - Approved code of
practice, Health and Safety Executive, Sheffield.

37

CORPORATE SOCIAL RESPONSIBILITY


The 1992 Trade Union and Labour Relations (Consolidation) Act required employers to
inform employees about work conditions and employment policies, but only if the company
recognised trade unions. Despite EU efforts to widen this requirement proposing that all
European companies inform or consult their employees on a range of issues whether or not
these employees belong to unions, the Blair government has resisted the initiative (Donnelly
et al, 2000).
The 1999 Employment Relations Act introduced procedures for union recognition and
collective bargaining that increase the likelihood of organised employeremployee relations
at the plant level for all firms with 20 or more employees. The act provides for mandatory
employer recognition of unions under the direction of the central arbitration committee
(CAC). Finally, the Employment Relations Act implemented the EU working time directive,
which business have been opposed on account of its restrictions on the capacity of firms and
employees to negotiate their terms of employment individually.
In terms of equality issues, in recent years, government policy also has shifted towards the
traditional model of external regulation. Due to EU pressures, ie, directives on parental leave
and proposals in the green paper - Partnership for a New Organisation of Work - employees
have gained the right to take time off for family emergencies, and have easier access to the
qualifying period for extended maternity leave. In this climate, the 1999 Employment Rights
Act introduced a longer maternity leave (unpaid) and has also implemented the EU parental
leave directive, which aims to reconcile the responsibilities of work and parenthood for both
genders.
The 1995 Disability Discrimination Act requires discrimination against people with
disabilities to be managed along the same pattern as sex and race discrimination. The act
covers trade associations as well as employers, and details a wide number of means by which
discrimination may take place in the modern workplace, both in hiring practices and in
membership rules. The act also established the national disability council (NDC) under the
secretary of state for Employment and Education to establish and develop a code of practice
on discrimination that does not confer direct legal liability on discriminators for their actions,
but could be used in hearings at industrial tribunals to provide a reference point for rulings. 80
By 1 October 1999, companies were required to change policies and practices that deter
disabled customers or potential employees in accordance with the code.81 To date, however,
research conducted on the NDCs behalf shows that 43% of UK businesses have not
complied with the code, even when contravention has been pointed out to them (NDC, 1999).
In terms of company relations to the natural environment, a very different approach which
also reflects the thrust of EU policy, has been evident first in the Environmental Protection
Act 1990. The act was designed to bring the regulation of industrial pollution under the
regime of integrated pollution control (IPC) signalling a change of corporate governance
practices with the intent of reducing and preventing pollution. 82 However, the act applied the
80

The NDC must consider the costs of its recommendations, and devotes much of its activity to developing
partnerships with businesses and associations to develop role models for the rest of the corporate community. In
its 1999 annual report, the NDC called on companies voluntarily to develop policies and practices to allow
disabled people equal access and employment opportunities, but considered more intrusive regulation an option
if firms failed to oblige.
81 National Disability Council (1999), Annual Report - April 1998 to March 1999, National Disability Council,
London.
82
Holroyd J (1993), Issues in Environmental Law - Present and Future Perspectives, European Business
Review, Vol 93, No 1, pp27-32.

38

CONSTANTINA BICHTA
less stringent standard of Best Available Technique Not Entailing Excessive Cost
(BATNEEC), as the standard preferred by the Environment Agency for granting
authorisation to industrial sectors to operate. BATNEEC was in itself less ambitious standard
than the European Commissions preference for a Best Available Technology standard. 83 As
McGuinness and Richards (1999) explain, the act, once more, underlined the importance of
minimising the cost and intrusion on business activities. 84 Interaction between public
authorities and companies was kept to a minimum by relying on prosecutions and fines for
polluters under the polluter-pays principle. 85
The 1995 Environmental Protection Act created the Environment Agency which began to
operate in 1996. The Environment Agencies gained the power to investigate the application
of IPC (focusing on emissions), and publicise the names of companies who had been fined
for environmental damage (McGuinness, Richards, 1999). A significant upgrading of
corporate responsibilities, with implications for internal governance, was first passed with the
Pollution Prevention and Control Act of 1999. The act implemented the European Unions
Integrated Pollution and Prevention Control (IPPC) Directive (61/96), which regulated a
significantly wider range of pollution sources, and consequently, a larger number of British
businesses than any previous legislation.
From 1999 the Environment Agencies have been responsible for monitoring and enforcing
the IPPC Directive. Companies are required to commit themselves to using best available
techniques rather than the BATNEEC to prevent pollution and waste, recycle where possible,
conserve energy, prevent accidents and return the site to its original condition at the end of
operations. The implementation of the IPPC represents a significant departure from the cost
orientation of previous legislation. 86
The 1999 Environmental Impact Assessment (EIA) regulations have implemented another
EU council directive (97/11/EC) which came into force on 14 March 1999. The regulations
formalise the relationship between companies and planners by requiring that local planning
authorities give notice in writing, with a public justification, that a company is required to
undergo the EIA. The directive allows each member state to set the thresholds at which an
assessment is deemed necessary, and requires member states to publish standards, so that
transparency of standards in Europe is achieved. The directive also makes assessments
mandatory in 14 areas that focus on resource extraction, infrastructure projects, handling and
processing of chemicals, and any process that impacts on water resources. 87
In terms of company and community relationships, the prevailing model in the UK has
always been that the wider community interests are best served by pursuing the interests of
shareholders. If there are adverse third-party effects they should be addressed through
externally imposed legislation.

83

McEldowney J, McEldowney S (1996), Environment and the Law - An Introduction for Environmental
Scientists and Lawyers, Addison Wesley Longman, Harlow.
84
McGuinness S, Richards P (1999), The Pollution Prevention and Control Bill (HL) - Bill 107 of 199899.
House of Commons Research Paper 99/58, 3 June.
85
Cullingworth J B, Nadine V (1997), Town and Country Planning in the UK Routledge, London.
86
Environment Agency (1999), Bringing in Integrated Pollution Prevention and Control, Environment Agency,
London.
87
Department of Environment, Transport and the Regions (1998c), Environmental Assessment - The EIA
Directive, HMSO, London.

39

CORPORATE SOCIAL RESPONSIBILITY


These later government initiatives on environmental protection and on equal opportunity
reflect an important shift in the understanding of the role of government in influencing how
firms display corporate responsibility to the wider community. Yet these initiatives do not
constitute a shift towards a model of engaging other stakeholders than shareholders
exclusively inside the firm, as witnessed in other European countries ie, Germany. 88 The
increased role of government, however, in assuming responsibility for providing incentives or
regulations which make companies more responsive towards evolving social issues does
mark a significant departure from the traditional British liberal model.

Current reforms - company law review (1998-2001)


The extended review of corporate law and governance in Britain suggests that the
underpinning principle of British corporate law since the early nineteenth century has been
the promotion of the interests of a firms shareholders. Governance issues in Britain have
been seen more or less associated with the board of company directors. Few exceptions
constitute the industrys own developed codes of corporate governance that leave ample
room for voluntary adoption by its members. The Labour government has tried to broaden
the concept of corporate governance through legislation that recognises employee and trade
union rights and sets standards for environmental emissions. But no legislation, so far, has
challenged the constitution of the firm and its responsibilities to social groups other than the
group of shareholders. This makes it fair to argue that, in recent years, legislation on
employment, equality and environmental protection issues was targeted to raise business
awareness of their social responsibilities but in a way that legislation has been primarily
facilitative of the purpose and main activities of business.
But businesses do not act and operate out of society. A significant number of social,
economic and political changes take place in the international arena, influencing domestic
policies. The European markets of gas, electricity, telecommunications, railways and
aviation are exposed to liberalisation as national barriers begin to fall. Global trade
movements find support in Western Europe and the worlds superpower, USA, as these
countries are getting ready to rip the benefits of a world trade market. The public in
western societies becomes genuinely interested in sustainable development, third world
debt, increased death toll amongst children and rising numbers of children living in poverty.
Prominent social, economic and political changes raise serious questions about the purpose
and contribution of business to society. The current corporate law review in Britain has not
gone that far, at least not yet, but it aims to address the economic and political challenges that
UK business will be asked to answer in the imminent and near future.

88

In Germany for instance, company law has been developed in a very different way to the British. While
shareholders remain the principles of the company, a more regulative approach has been adopted with regard to
shareholder rights. Since the 1870s, the state intervenes in the internal structure of the firm. Rather than a
voluntaristic approach to shareholder control, public authority has been used to constitutionalise the
interactions between shareholders and management through a densely regulated two tier board system. The
two-tier system has delegated many supervisory tasks from the shareholders meeting to a newly created
supervisory board, as well as separating management and supervisory functions. Over the decades, this
constitutional model of company decision making has been expanding to include other stakeholders,
particularly employees, through representation on the supervisory board and works councils (Donnelly et al,
2000).

40

CONSTANTINA BICHTA
The concern that business could be held back by outdated company law requirements and
therefore loss in competitiveness, triggered a review of British company law. An
independent three year review of company law (1998-2001) was launched by the DTI with
the primary aim to address the needs of small companies and give flexibility to company law
to accommodate any future developments.
An independent steering group was formed to oversee the management of the review. During
the course of the review, the steering group published a number of consultation documents
covering a wide range of issues. 89 The steering group presented its final report to the
secretary of state on 26 July 2001, which included the following main recommendations
(Company Law Steering Group, 2001).
A company law framework that encapsulates the needs of small private companies and
provides for their economic prosperity was acknowledged to be imminent. This was because
of the rise in number of small private companies in Britain and the lack of previous
legislation in providing a supportive legal and institutional framework. The new company
law framework would ensure that companies have all government support they need to
prosper in the modern economy: reduced costs, the creation of a climate which encourages
people to set up their businesses and make them grow; a framework which encourages inward
investment and the laying out of transparency rules to attract more investors in the industry.
Thus, the primary scope of company law review has remained the exploration of alternative
means to boost confidence in industry and therefore guarantee it an increased competitive
edge.
The appropriate legislative and institutional frameworks underpinning the new company law
were as follows: company law and company governance should be defined in primary and
secondary legislation. The approach of light touch regulation ie, the combined code would
be used when appropriate. However, the legislative framework of company law and
governance will be under continuous review to ensure a flexible and responsive institutional
structure for rule-making and enforcement. Secondary legislation ie, reporting and
accounting rules, and the creation of a body to oversee industry compliance and advise on
legislation should also be part of the new institutional framework of British company law.
The governments responses to the steering groups proposals were published in the white
paper on 16 July 2002 (DTI, 2002). Accordingly, the government proposes to review
company law by putting first the emphasis on the development needs of small companies.
The government proposes to simplify the decision-making process of companies, by
removing the requirement for private companies to hold annual general meetings (AGM)
unless company members decide they want them, and by simplifying the rules on written
resolutions to make it easier for private companies to make decisions. Whilst the government
is keen to see institutional investors playing a more effective role in corporate governance, it
is believed that this will be achieved by increasing the transparency and accountability rules
governing companies in Britain. In terms of directors duties, the government has proposed
that law should define them and, hence, the primary duty of directors should be the
promotion of interests of a companys shareholders. However, when circumstances require
otherwise, directors must also promote relationships with employees, customers, suppliers
and consider the impact of company decisions on the community and working environment.

89

All consultation documents can be accessed online at www.dti.gov.uk/cld/reviews/condocs.htm.

41

CORPORATE SOCIAL RESPONSIBILITY


Towards improving corporate governance rules, the government proposes that the board may
determine the remuneration packages of managing and executive directors.
The government also has taken the view that corporate governance is Britain will be
improved by applying clearer and more transparent reporting and auditing rules. In brief, a
supplementary statement will replace the existing directors report for all companies other
than the large companies who will be required to prepare an operating and financial review
(OFR). 90 Small companies will be defined according to the EU standards and quoted
companies will be required to publish their accounts on their website within four months of
their year end. 91
Company law and corporate governance will also be improved by strengthening the bodies
overlooking the industrys compliance with the new legislative and institutional framework.
In this vein, the government proposes the creation of a standards board developed from the
existing accounting standards board (ASB) and charged with the role to make detailed rules
on accounting, reporting and disclosure issues. A successor body to the financial reporting
review panel (FRRP) will enforce form and content rules on public and private companies.
Companies House will continue to enforce these rules for small private companies. The new
standards board will also take over the role of the UK listing authority to review the
combined code and oversee companies compliance with the code.
A new companies bill is being drafted to materialise the governments proposals in
modernising company law and governance in Britain. Overall, the draft bill is expected to
result in significant savings of both money and management time, especially for small
companies, through simplification and improved clarity of the law and repeal of unnecessary
burdens. Work to date has identified potential yearly savings for small and private
companies estimated to total 168m. 92 The draft bill also looks into the sanctions for breach
of requirements of company law. The aim is to create a coherent and internally consistent
scheme of sanctions which will support the requirements to which they relate in a manner
which is fair, proportionate and effective. The intention is to provide a regime which
contains sufficiently dissuasive penalties, as required by European law where the draft bill
implements EC directives, which are comparable for similar forms of offences. The structure
and effect of each sanction will be consistent with the Human Rights Act and the European
Convention on Human Rights. Enforcement will be through a variety of means, depending
on the nature of the breach. 93 Overall, sanctions and enforcement will be maintained as at
present but will be conducted on a more systematic basis.

90

A narrative report on the companys business, the company performance and its future plans (DTI, 2002).
A small company is defined as follows: turnover no more than 4.8m; balance sheet total 2.4; number of
employees no more than 50.
92
More information is available at the draft overarching regulatory impact assessment, which was published
together with the white paper.
93
For example, Companies House will, as now, be responsible for enforcing penalties for late filing of reports,
accounts and other information required to be sent to it. The successor body to the FRRP is expected to have
powers similar to those of the current panel to enforce accounting requirements and parallel new powers in
respect of certain disclosure and corporate governance provisions. Some provisions are for enforcement by
companies or their members, e.g. breach of directors duties. There will continue to be a range of civil remedies
or consequences available, including redress of injured parties through the courts and voidance of particular
unauthorised transactions.
91

42

CONSTANTINA BICHTA
British company law and corporate governance - final remarks
With regard to the evolution of British company law, it is suggested that it has gradually
established legal responsibilities to safeguard particular relationships over time, by
prescribing particular standards or patterns of behaviour eg, bankruptcy law to protect
investors and contract law to protect business from other business, and increasingly, the
protection of stakeholder interests through employment, consumer, environmental law etc.
Under the new company law review, however, the right to limited liability remains
unchanged, but it will be accompanied by new measures for increased accountability.
To be in a position to protect those affected by a companys activities (eg, shareholders,
creditors, employees) and to prevent abuse, the law contains new safeguards. Among these
are the requirements on companies to make annual returns; to prepare and file accounts
publicly in accordance with prescribed standards; to have an annual independent audit (with
some exceptions for small companies) and not to make certain changes to a companys
capital structure without shareholders consent. Moreover, some requirements are aimed at
protecting companies themselves, for example provisions enabling companies to require the
notification to them of shareholdings exceeding certain limits.
There are certain issues in the company law review which relate to corporate governance.
For the first time, the company law places duties on company directors. It is proposed that
they should be made explicit in legislation and in a form that draws specific attention to the
importance to business success of fostering relationships with employees, moderating adverse
environmental and community impact and protecting companys reputation. The counterpart
to these proposals is disclosure of information on performance in each of these areas where
material. The intention is that the obligation to disclose will increase company sensitivity
and strengthen the position of interested parties to put pressure on companies to improve
performance (Donnelly et al, 2000).
With regard to remuneration, the government has taken the view that the private sector
initiatives have not been successful and it seems ready to proceed with legislative
intervention.
In terms of company monitoring issues the government has also launched an independent
review to examine the role and effectiveness of NEDs ie, whether the monitoring role of nonexecutives is effectively carried out and whether boards have enough independent NEDs to
be able to discipline management. 94
In conclusion, the British approach regarding company responsibility and accountability
arising out of the company law review is that the company must retain overall responsibility
to shareholders but this should be understood in a rather inclusive way. As it will be argued
in the next chapter, the Labour government has begun to apply economic performance criteria
94

Following the company law review, the Secretary of State for Trade and Industry launched an independent
review to examine the role and effectiveness of NEDs. The review which builds on the previous works of
Myners and company law review aims to assess: the population of non-executive directors in the UK - who they
are, how they are appointed and how they can be drawn from a wider pool of talent; the independence and
effectiveness of non-executives; the actual and potential relationship between non-executives and institutional
investors; and what could be done to strengthen the quality, independence and effectiveness of UK nonexecutive directors. In DTI (2002), Derek Higgs appointed to lead review of non-executive directors, press
notice, 15 April.

43

CORPORATE SOCIAL RESPONSIBILITY


to determine whether the economic performance of the firm might be improved by
broadening the range of groups whose interests directors must consider in the decisionmaking of the firm.

Current political views on CSR


Following the discussion in Chapter 2 and 3 about the role of government in CSR, it appears
that there it might be a place for it but the question remains open about the nature of
government role in CSR: should it be interventionist, or complementary to industrys initiated
activities? It is the intention of the following sections to discuss the present positions shared
by the UK government and the European Union in terms of promoting CSR at national and
European levels.

The UK government position


- The view and role of UK government in relation to CSR
The Labour government has defined CSR as behaviours that goes beyond basic legal
requirements and it has developed three pillars to promote CSR practices amongst the
business sector:

an organisation should recognise that its activities have a wider impact on the society it
operates;
in response, the organisation should take account of the economic, social, environmental
and human rights impact of the activities across the world;
the organisation should seek to achieve benefits by working in partnership with other
groups and organisations. 95

The prevailing view of this government in relation to CSR considers that in real terms, CSR
must have some economic foundations and therefore assist not compromise organisational
performance. By doing so, organisations preserve the interests of their shareholders but also
explore new means of enhancing economic performance that in many ways could go beyond
and exceed legal requirements. Two reasons account for this view supported by the UK
government.
First, there are two competing perspectives in defining and practicing CSR, one derived from
the stakeholder theory of the firm (see earlier pages), and another one which promotes the
business case.
The approach that this government has taken in relation to CSR is the widely cited business
case for corporate social responsibility. The government uses economic performance criteria
to determine whether the economic performance of the firm can be improved by broadening
the range of groups whose interests the directors of a firm should consider during the
decision-making process. The government therefore sees the economic case for departing
from an exclusive shareholder focus by developing and monitoring sustainable relationships
with key stakeholders such as employees, suppliers and local communities. This view is

95

Department of Trade and Industry (2002), Business and Society Corporate Social Responsibility Report.

44

CONSTANTINA BICHTA
strongly supported by studies that reveal a value creation for companies who develop strong
long term cooperative relationships with companies, employees, customers and suppliers.
Secondly, studies also show that CSR creates social value and improves social welfare, both
of which constitute the primary goals of government policy. Government therefore appears
willing to explore the potentials of CSR as a policy tool for improving and enhancing the
welfare of its people.
In terms of government role in relation to CSR, the Labour government sees itself as having
to play a complementary role in fostering CSR knowledge across the business sector and
encourage it to adopt best practice. The government believes that this can be done by setting
minimum standards for industry to abide by, providing fiscal incentives, encouraging
industry to take the initiative and adopt voluntary measures on CSR and co-operate with
government to promote CSR at the national and international level.
The UK government view on CSR has been demonstrated in particular government
initiatives: the appointment of a cabinet minister, Stephen Timms, on CSR and the
publication of the first CSR (UK) annual report (2002). The new thinking is also reflected in
the DTIs company law review (19982001) which considers the merits of extending
directors duties to stakeholder groups such as the local community; and in the white paper
on competitiveness (DTI, 1998c) which stresses the importance of highlighting best practice
on corporate responsibility, and the 1998 pre-budget statement which announced a review of
fiscal incentives which could foster the involvement of companies with the community.
Another important area of policy deliberation is the Inland Revenues review of charity tax
which helps determine the tax treatment of giving in-kind by companies and employees.
Payroll giving was set up by government in October 2000 and has been seen as a taxeffective way for employees to donate to charity by authorising a deduction from their gross
before tax. 96 In November 2001, the government introduced environmental reporting
guidelines to help companies manage their environmental impact and set targets for improved
performance. Environmental reporting guidelines suggest key indicators for industry to
report against and cover greenhouse, waste and water emissions. They can be adopted by
industry on a purely voluntary basis. Since July 2000, the revised Pensions Act 1995 requires
pension funds to report whether they have considered social, environmental and ethical issues
when invested their money.
In all these instances government saw itself as having a major role to play in influencing the
development of corporate responsibility. Thus for non-employment issues the government
believes that a variety of mechanisms ie, fiscal instruments such as subsidies, tax credits
could influence corporate behaviour but in areas like environmental protection and equal
opportunities the imposition of legal minimum standards could be proven critical (Donnelly
et al, 2000).
Meanwhile, the MP Linda Perham introduced a corporate responsibility bill to parliament in
June 2002. 97 The bill is supported by a private group, the Corporate Responsibility Coalition
(CORE) with members, the Friends of the Earth, the New Economics Foundation, the
96

The scheme launched with a 2m budget aims to double donations from 29m in 1998/99 to 60m a year,
raise the number of employees with access to payroll giving from 1 in 5 to 1 in 3, and attract higher donors, DTI
(2002), p15.
97
The House of Commons (2002), Corporate Responsibility Bill, 12 June, The Stationary Office, London.

45

CORPORATE SOCIAL RESPONSIBILITY


Catholic Agency for Overseas Development and Save the Children. 98 The main proposals of
the bill favour mandatory social and environmental reporting, consultation of stakeholders on
decision-making of major projects, rights of redress for people negatively impacted by
business activities, directors to be subjected to fines or imprisonment if they commit CSR
related offences, and the creation of a body to oversee industry compliance with social end
environmental standards. Despite the support the bill received from 185 MPs, it is not
expected to become law, at least not at present.
The government keenly supports an intergovernmental role in support of CSR. In this vein,
the government has been signatory to international agreements aiming to encourage
responsible business behaviour and best practice ie, the 1998 declaration on fundamental
principles and rights at work of the International Labour Organisation (ILO), the ILO
tripartite declaration of principles concerning multinational enterprises and social policy, and
the OECD guidelines for multinational enterprises. In terms of sustainable development, the
UK government has supported the UN Global Compact initiative which encourages
companies to build nine core principles into their business strategies and report on the triplebottom line: economic, social and environmental issues.

The EU position on CSR


The European Union stood publicly in favour of corporate social responsibility in 1993 when
President Delors appealed to European business to participate in the Unions fight against
social exclusion. A few years later, at the European Council Summit in Lisbon in March
2002, the European Union set itself new strategic goals to pursue in the twenty first century,
such as becoming the most competitive and knowledge driven economy in the world. In
order to achieve these objectives however, the council addressed business directly in a
special appeal to companies corporate sense of social responsibility regarding best practices
on lifelong learning, work organisation, equal opportunities, social inclusion and sustainable
development.
The European Unions green paper in June 2001, marks officially the launch of a Europeanregional debate about the development and future of a common European framework for
CSR. 99 With the green paper, the EU really intended to kick off a debate on Europes
position on CSR and seek views on the preferred methods to be adopted for practising CSR in
Europe. The paper defined CSR as a concept whereby companies integrate social and
environmental concerns in their business and in their interaction with their stakeholders on a
voluntary basis and acknowledged CSR as business behaviour that exceeds legal
requirements. The paper strongly promotes the business case for a CSR policy in Europe
in terms of business competitive advantage, increased sales and reputation, improved
productivity by developing relationships and liaising with employees, local communities,
customers, suppliers and business partners. It is, therefore, hardly surprising that business
respondents to the green paper have welcomed the economic case for CSR and urged the
European Union to enrol in further activities that enlighten the understanding of financial
returns of practising a CSR policy. Furthermore, business has been in favour of a voluntary
approach to CSR, and sees the EU with a role to promote best practices and transparency
among member states. The UK business has been no exemption to the above rule, and in
addition they have added the importance of adhering to low national regulatory standards of
98

Mathias A (2002), Voluntary vs Mandatory - CSR debate rages, Environmental Finance, July-August, p8.
European Commission (2001), Promoting a European Framework for Corporate Social Responsibility, Green
Paper, Employment and Social Affairs Directorate.
99

46

CONSTANTINA BICHTA
CSR as opposed to a common European CSR framework. A voluntary approach to CSR has
been criticised by trade unions and civil society organisations who argue that such initiatives
would be insufficient to protect workers and citizens rights (EC, 2001).
Business, however, calling for a voluntary European CSR approach did win the day, as was
demonstrated a year later in the communication published by the Commission in July 2002
which set out the European Unions framework for CSR. 100
The communication defines CSR as a business behaviour that goes beyond legal
requirements and links CSR to sustainable development in terms of requiring business to
integrate economic, social and environmental issues into existing management practices and
operations. Most importantly, CSR is defined not as an optional add-on to business activities
but as a method of conducting business (CEC, 2002). Like the UK government, however, the
commission intends to use CSR as a tool/method that facilitates the materialisation of its long
term policy objectives ie, a knowledge driven economy built on innovation and new
technologies. CSR therefore can serve best this objective as it requires a reappraisal of
business operations, innovative thinking, re-designing relationships with stakeholders and
continuous improvement of business practice.
In terms of a CSR policy framework, the European CSR policy will built on the core
principles of international agreements, adding therefore support to the ongoing role of EU to
support social and economic policy issues at the international level. International agreements
however will be applied in full respect of subsidiarity principles. In the communication, the
EU assigns itself with the role of facilitating knowledge and best practice regarding the
impact of CSR on business and society and most importantly, re-appraising transparency and
reporting rules and developing common, clear and verifiable criteria or benchmarks.
The European multi-stakeholder forum launched in Brussels in 16 October 2002, promises to
deliver by 2004 answers regarding the convergence and transparency of existing CSR
practices and tools namely, codes of conducts, labelling, management standards, (accounting,
auditing) reporting, social responsible investment and certifications schemes. 101 The forum
will also seek to define commonly agreed guidelines for consumer labelling such as organic
labelling, fair trade and CSR measures supporting ILO conventions and environmental
standards. 102 The multi-stakeholder forum has been allocated a steering role towards
exchanging experience and good practice between actors at the EU level and identifying
action areas at the EU level. The forum, chaired by the commission has brought together
representatives of employees, consumers, civil society, professional associations and business
networks, and it is expected, by 2004, to present its findings on activities the commission
should engage to promote and strengthen CSR further among its member states.

100

Commission of the European Communities (2002), Corporate Social Responsibility - A Business


Contribution to Sustainable Development, COM (2002) 347.
101
See www.europa.eu.int, Corporate Social Responsibility - Commission launches European multi stakeholder
forum, press release, 16 October 2002; and A New Strategy and a Pioneering Forum for Stakeholder Debate,
CSR Magazine, October 2002, CSR Europe.
102
Commission of the European Communities (2002), Consumer Policy Strategy, COM (2002), 208, Official
Journal of the European Communities.

47

CORPORATE SOCIAL RESPONSIBILITY

Two prevailing models of corporate social responsibility


The theoretical debates and the political discussions around the notion of corporate social
responsibility suggest that there is little consensus regarding the meaning and role of CSR for
industry and government. The discussion in Chapters 3 and 4 prompts the identification of
two prevailing perspectives of CSR, which consequently facilitate the development of two
competing CSR models.
The first perspective of CSR is derived from the stakeholder model and contains the
commitment of the firm not to undertake socially unacceptable practices ie, using suppliers
who employ child labour. This approach is more in line with the ethical and social norms of
the rest of society and of individual managers. Corporate responsibility is interpreted
proactively; the company has a positive responsibility to adopt, rather than avoid, certain
norms of behaviour in relation to communities. It makes corporate citizenship a central issue
for business strategy, particularly as regards policy on human resource management and
recruitment policy. This approach also assumes that this licence to operate will not be
static. As social trends and attitudes evolve so will the terms of the licence (Donnelly et al,
2000). Corporate social responsibility issues correspond to the mission and vision of the firm
and hence become an integral part of daily decision-making.
The second perspective supports the widely cited business case for developing and
monitoring sustainable relationships with key stakeholders including employees, suppliers
and local communities. These relationships are used to provide companies with legitimacy
and trust, in other words with a licence to operate, which constitutes a source of competitive
advantage. Consequently, there is no long-run trade-off between the interests of stakeholders
and shareholders. 103 The same perspective also promotes the business risk case from
failing to practice CSR. Corporate social responsibility becomes the new risk management
tool that allows firms to increase opportunities having evaluated the risks involved by
developing and practising a CSR strategy and vice versa.
The first approach requires firms to practice CSR proactively as CSR is embedded in
organisational values, and firms are required to demonstrate behaviour that goes beyond legal
requirements. The second approach expects firms to adhere to best practice standards
developed either voluntarily by industry or jointly developed by industry and government.
There is a place and role for government under both perspectives in that the stakeholder
model of the firm expects government to revise corporate law and make it obligatory for
firms to have the interests of stakeholders represented in board meetings and the decisionmaking of the firm. The business case for CSR recognises two sets of corporate-legal
standards; the corporate law ie, the promotion of interests of the firms shareholders and the
setting of legal standards ie, environmental protection, labour practices, human rights,
discrimination etc. Government may also intervene through tax incentives and subsidies
under the business case for CSR.
These two prevailing perspectives of CSR prompt the development of two contrasting models
of CSR. Figure 3 provides a schematic overview of the two models.

103

Grayson D (1996), The Community as a Stakeholder, Corporate Governance and Competitiveness, Westall A
(ed), Institute for Public Research, London.

48

CONSTANTINA BICHTA
Figure 3: Two contrasting models of CSR

The stakeholder model


Principle:
Avoid undertake socially
unacceptable practices,
stakeholder interests to be
represented at company level

The government

Practice:
CSR integral part of decision
making; proactive action that
goes beyond the law

The business case model


Principle:
Self-interest, commercial
priorities, business risk case,
risk management tool

The government

Practice:
Voluntary action, best practice,
compliance plus, compliance
with legal standards ie, national
law and international
conventions

49

CORPORATE SOCIAL RESPONSIBILITY

50

CONSTANTINA BICHTA

5 THE REGULATED INDUSTRIES


Introduction
This chapter comprises the empirical part of this research report. It discusses the current
status of CSR in the regulated industries as it is currently understood and practised by the
industry players themselves.
Corporate social responsibility issues have increasingly become an important element of
strategic decision-making in the industrial sector. In recent years, the importance of CSR for
the UK regulated industries, namely, the water, energy, transport and communications
sectors, has been recognised due to the unique position these sectors hold in relation to
customers and society. That is, the water companies are licensed to supply customers with
clean water, the energy and transport companies are expected to prioritise, over and above
business imperatives, the health and safety of customers, and the integrity and privacy of a
telephone call is a prerequisite of a license to operate for a telephone company.
Slowly, but gradually, actors of the regulated industries begin to associate their long-term
prosperity with the possession of a moral licence, granted to them by customers and
government, in recognition and as a reward of their involvement and contribution to
communitys welfare. 104
At the UK level, the regulated industries appear to make progress towards addressing
corporate social responsibility issues in their boardrooms. Business in the Environment
(BiE), a business led organisation for business environmental responsibility in the UK and
abroad, conducts an annual survey of FTSE listed companies to identify the best performers
on environmental issues. In last years annual survey approximately one third of the
companies in the top twenty were the listed parents of regulated industries (Carey, 2002).
Companies such as BT, Railtrack, Seven Trent, Powergen and Thames Water are cited often
as examples of companies who have improved social, environmental performance and
communication with stakeholders.105
It is the objective of this chapter to discuss the current status of corporate socially responsible
practices in the context of the UK regulated industries. To do so, this chapter draws
information from the annual and company reports that companies publish in relation to CSR.
Empirical information will be used to demonstrate whether the information reported by
companies corresponds to CSR practice, as defined in the early chapters of this report. CSR
practice will be distinguished from merely compliance with law. Chapter 6 will state the
implications arising out of current CSR practices in the regulated industries for government,
and government policy, in general.
Hence, this chapter is structured as follows:

104

Carey A (2002), CSR and Corporate Governance, Regulated Industries - The governance contract, CRI
Proceedings 30, University of Bath.
105
The Business in the Environment (BiE) website (2002), http://www.business-inenvironment.org.uk/casestudies.html.

51

CORPORATE SOCIAL RESPONSIBILITY

a description of the current legal framework for the regulated industries, which is
important to clarify the political context that is likely to influence/determine the level of
CSR activity of the sector;
later, the discussion moves to a description of activities that government departments and
regulators currently undertake to promote CSR across the sector;
the final section is devoted to an empirical analysis and discussion of CSR activities at
company level in the utilities and network industries.

The legal framework for UK regulated industries


In the context of this paper, it is very important to identify the existing regulatory framework
for the regulated industries, for three main reasons:

to facilitate an understanding of the current role and level of government involvement/


intervention in the sectors socially responsible affairs;
to facilitate a critique of opportunities created and outputs delivered by industry under the
existing legal framework;
finally, to reflect on this framework and discuss the scope for government involvement in
the CSR practices of the regulated industries.

The present institutional and regulatory framework of the regulated industries has it origins in
the early eighties, when most British national industries were privatised. 106 The objective of
privatisation was to protect consumers from abuse of monopoly power of natural monopolies
like gas, electricity, telephony, water supply etc. Over the years, market competition has
been increased gradually through regulatory intervention. Competition led to improvements
in the economic efficiency of the regulated companies, reductions in price and increased
consumer choice, particularly in terms of new available products and services.
During the past twenty years, the regulatory framework of the regulated industries has been
tested and developed around four main pillars:

the government;
an independent economic regulator;
the regulated companies;
customers.

During these years of privatisation, the role and responsibilities of these bodies have
remained the same, but they have also developed. For instance, the principal role of the
economic regulator is to protect the interests of consumers by improving the economic
efficiency of the sector through the means of incentive regulation. In the telecommunications
sector, the office of telecommunications, Oftel, currently reviews market segments to lift
regulation where competition has been effectively developed. In the rail industry, the
Strategic Rail Authority (SRA) and the Office of the Rail Regulator (ORR) have signed a
memorandum of understanding (MoU) which claims a collaboration of the two bodies in
policy development for industry and its passengers. A similar MoU was signed by the postal
services regulator, Postcomm and the postal services consumer council, Postwatch, with the
aim to enhance representation of consumer interests in the postal services sector.
106

52

Bichta C (2002), Regulation of UK Postal Services, Industry Brief, CRI, University of Bath.

CONSTANTINA BICHTA
One, therefore, could argue that the role of the principal actors of the regulated industries
has been crystallised during the years of privatisation whereas, their responsibilities have
been evolved and could evolve further depending on market and political forces.
Vass (2002) has articulated the main elements of the regulatory framework currently applied
to the regulated industries into a generic framework (of regulation), enforced across the
sector. 107 The main elements of this regulatory framework are defined as follows:

the government which is responsible for regulatory policy and setting the
output requirements (in general or specific terms as required). The
government must ensure that the regulatory framework as a whole is
consistent and effective, that is, each regulatory element properly plays its part
in the context of the whole. ..The governments regulatory framework
will have to have regard to the institutional endowment and constitutional
context of the country.
the regulators who are responsible for the executive implementation of that
policy, with the appropriate degree of independence and discretion;
the regulated companies which focus on customers, but with the protection
of an appeal process to the Competition Commission, or the courts (judicial
review), where regulators actions are considered unreasonable or arbitrary. 108
the customers who look to the companies to provide good service and to
address, where necessary, complaints. However, customers are protected by
consumer committees which can represent them, and have powers to take up
unresolved complaints on their behalf (or to remit them to regulators for
enforcement).
finally, feedback is an important element in the evolution of an effective
regulatory system (Vass, 2002).

All elements that comprise the existing regulatory framework of the UK regulated utilities are
represented in a two-way, tri-partite model, as shown in Figure 4 (Vass, 2002).

107

Vass P (2002), The Principles of Better Regulation Separating Roles and Responsibilities, Regulated
Industries The Governance Contract, Proceeding 30, CRI, University of Bath, pp21-42.
108
The suitability and effectiveness of the appeal remedies currently available are much debated, it being
suggested that there is insufficient protection against arbitrary regulatory decisions. In any event, rights of
appeal may in due course be affected by the recent incorporation of the Convention on Human Rights, and the
government has decided to set up a competition appeal tribunal (CAT) which is to be separate from the
Competition Commission, proposals which are incorporated in the Enterprise Bill 2002.

53

CORPORATE SOCIAL RESPONSIBILITY


Figure 4: The regulatory framework
Feedback

Government
(policy)

Parliamentary audit and scrutiny


(NAO and Select Committees)

Public goods and


externalities
Quality regulators
eg, the EA and HSE
Consumer affairs (DTI)*

Consents
monitoring
enforcement

Executive regulation
(implementation)

(a)
(b)

Abuse of monopoly
power
(c)

Independent
economic
regulators**

Consumer
information
Consumer
Consumer
advocacy representation

Social equity

For example:
Department of Social
Security***
Income support
social protection
and entitlements

Appeals
(Competition Commission
Appeal Tribunal
and judicial review)

Regulated companies
(public service providers)

Complaints
Consumers

The next section discusses specific activities that government, its departments and the
economic regulators are currently undertaking to foster CSR practices across the regulated
companies.

CSR activities in UK regulated industries


The government and its departments
As discussed earlier in Chapter 4, the Labour government sees a role for itself in promoting
social responsibility across the corporate sector. This role is a facilitative one and
comprises:

54

to raise awareness of the business case for CSR;


to lend government support to business own initiated activities;
to promote consensus of common codes of practice at the international level;
to support the development of a common framework for reporting and labelling.

CONSTANTINA BICHTA
To execute this role, the government has developed a CSR strategy, which was announced in
the CSR annual report (2002) and which sets out to encourage both private and public sector
institutions to account for their economic, social and environmental footprint on the planet,
and hence operate in a manner that considers any adverse industrial impact on the social and
natural environment.
In the following paragraphs, the particular initiatives and activities that government and its
departments are committed to, in order to foster CSR in the UK regulated industries, are
considered. The reader could use the CRIs research report - Regulatory Framework
Institutional Responsibilities and Relationships to study the institutional structure and
decision-making of government departments for the UK regulated industries. 109
The importance that the UK government attaches to CSR is evident in its decision to
mainstream CSR across government departments. In this vein, since its formation in 2001,
the Department for Environment, Food and Rural Affairs (Defra) has been assigned the
responsibility for protecting the environment, Britains countryside and wildlife, supporting
the development of rural areas and delivering sustainable development. With the aim of
increasing the environmental responsibility of the corporate sector, Defra produced
environmental reporting rules, setting out environmental performance indicators of waste,
water and air emissions for the industrial sector to report against.
The government sponsors and monitors programmes which promise to deliver a sustainability
management system (project SIGMA) and assist with the implementation of environmental
management systems (EMS) on small medium enterprises (SMEs) (project ACORN).
Another government programme, the so-called Make a Corporate Commitment (MACC2)
has brought together participants from both private and public sector bodies. The participants
are expected to improve environmental performance against the government set targets, but
in addition, to improve performance against other areas which may include use of raw
materials, biodiversity, green travel planning, and further reduction of air emissions.
Amongst the signatories to the programme are companies from the regulated industries such
as BAA, British Gas, BT and Seven Trent.
Defra and the DTI have lent their support to business initiatives to develop sector specific
guidelines for achieving sustainability and improving sectoral performance proactively.
Water UK, the industry association for UK water and wastewater service suppliers, has
published a set of indicators which cover water services, environmental management,
biodiversity, and the use of energy. 110 111 The water companies use these indicators as a
benchmark for reducing emissions and contributing to sustainable development.
The Home Office has launched the Active Community Unit (ACU) with the aim of
encouraging individuals from the corporate community to contribute personal time and skills
to the communities in which they live. The community tax credit and the community
development venture fund are government incentives for encouraging corporate donation in
the community. The former aims to attract private investment through Community
109

Lawrence G, Simmonds G, Vass P (2002), The Regulatory Framework Institutional responsibilities and
relationships, Research Report 13, CRI, University of Bath.
110
Water UK (2000), Towards Environmental Sustainability, May; Water UK (2001), Towards Sustainability
A step forward, June; Water UK (2002), Towards Sustainability A step forward, March. All three reports can
be downloaded from http://www.water.org.uk.
111
The Society of Motor Manufacturers, the British Retail Consortium and the UK Offshore Operators
Association have also published sector specific guidelines with regard to sustainable development.

55

CORPORATE SOCIAL RESPONSIBILITY


Development Finance Institutions (CDFIs) in both not-for-profit and profit-seeking
enterprises in under-invested communities. Qualifying investments attract tax credits worth
25%, spread over a period of five years. 112 The latter is a funding partnership between
government and the venture industry to provide venture capital finance to firms operating in
disadvantaged areas (DTI, 2002). The Giving List for companies listed in FTSE 100 recently
rated companies from the regulated industries amongst the top 35 givers of 1% of pre-tax
profits to charities, voluntary organisations and community projects. 113 114
To summarise, the UK government has taken a favourable role of CSR across the industrial
sector and the regulated industries. At the moment, this role strives to encourage CSR
behaviour through the development of a supportive legal framework and the use of fiscal
instruments - provision of economic/tax incentives.
How the independent economic regulators in the regulated industries add their support to
this government approach, is examined in turn.

The economic regulators


The role of the economic regulator in the regulated industries is to act independently from
government in that the regulator is required to:
monitor and enforce the required outputs, and provide incentive models
(whether by competition or price control) to promote efficient and innovative
delivery of the outputs (with suitable rights of appeal by the companies to the
Competition Commission). (Vass, 2002, p38)
Economic regulators, however, are required to have regard to social and environmental
guidance issued by government and government departments. Consequently, regulators are
placed under the duty to promote social and environmental policy objectives in the sectors
they regulate through regulatory and/ or non-regulatory tools, which may include:

enforcement of conditions into the licence of operators;


the application of sector specific codes of conduct;
the setting of quality performance standards etc.

With the exception of the water regulator, all other regulators are required to play a role in
assisting company activity on social and environmental issues. The Water Bill that is
currently going through parliament, includes a clause that will also allow the secretary of
state to issue social and environmental guidance. The progress achieved to date across the
offices of the economic regulators is the topic of discussion in the following paragraphs.
The UK gas and electricity markets are regulated by the gas and electricity markets authority
and the office of gas and electricity markets (Ofgem). The authority is responsible for the
statutory duties and for developing strategy and policy. Ofgem is responsible for day-to-day
operations and implementing policy. 115 The Utilities Act 2000 which amended the
112

An investor putting in 100K will be able to reduce his or her tax bill from other activities by 5k per year
for five years (DTI, 2002).
113
The Giving List is published jointly by The Guardian and the Business in the Community PerCent Club.
114
The Guardian, FTSE-100 givers, The Giving List, 25 November 2002.
115
Simmonds G (2002), Regulation of the UK Electricity Industry, CRI, University of Bath

56

CONSTANTINA BICHTA
Electricity Act 1989 requires Ofgem to have particular regard to the interest of individuals
who are disabled or chronically sick, of pensionable age, with low incomes, and those living
in rural areas, and a responsibility to provide guidance on the social and environmental
objectives of the sector (Simmonds, 2002). Ofgem is expected to publish annually an
environmental and social action plan, demonstrating how the regulator has helped the
facilitation of the social and environmental objectives issued by government for the gas and
electricity markets. To assist government in achieving its environmental objectives set for
the energy market, Ofgem is required to develop the environmental action plan around the
following areas:

energy efficiency;
energy efficiency commitment;
energy services;
renewables;
embedded generation (Simmonds, 2002).

In the first environmental action plan, Ofgem published the results achieved in relation to its
environmental responsibilities. These included:

completion of accreditation of generators and certification of renewable energy as exempt


from the climate change levy;
guidelines for green supply offerings;
publication of a review of the effects of the new electricity trading arrangements (NETA)
on small generators;
proposals for action by distributors on interim measures for connecting charges for
distributed generation;
proposals for the reform of electricity transmission access and losses in England and
Wales, to move towards locational pricing signals;
inclusion of environmental performance in the output measures forming part of the price
control for gas transmission and distribution; accreditation of Ofgems office under the
ISO 14001. 116

Ofgem is also required to make a contribution to governments social policy objectives,


which, in relation to the energy sector, are laid down in the governments fuel poverty
strategy. Ofgem has published three social actions plans containing the activities undertaken
to facilitate the government objectives. So far, these actions involve:

116

revised guidance notes to improve the delivery of suppliers social obligations, resulting
in new codes of practices;
steps to reduce prices through the NETA and price controls;
operation of the third energy efficiency standards of performance (EESoP) scheme, in
which sixty five per cent of the funding is directed to disadvantaged customers;
the establishment of an industry working group to develop a process to enable
prepayment meter customers with debts to transfer supplier;
the establishment of a working group to review the operation of fuel direct for
customers in receipt of means-tested benefits, and to recommend improvements to the
scheme; encouraging suppliers to develop a range of innovative new schemes to help the
fuel poor (Simmonds, 2002, pp124-125).
For more information see Ofgem (2002), Environmental Action Plan Annual review 2001-02, June.

57

CORPORATE SOCIAL RESPONSIBILITY


The regulator of gas and electricity markets is also required to set guaranteed standards of
performance for electricity suppliers under the Electricity Act 1989 (as amended by the
Utilities Act 2002). The Electricity Regulations 2000 prescribe the penalties to be paid by
companies to consumers for failure to meet the specified performance standards (Simmonds,
2002). Since October 2000, Ofgem has embarked in a review of the performance standards
applying to the previous public electricity suppliers (PESs) for distribution, supply and
metering and the revised performance standards are enforced through conditions in the
licence of electricity market operators.
In the water sector, the Office of Water Services (Ofwat) serves as the economic regulator.
The primary duties of the director general of Ofwat are to act in a way that the director judges
will enable efficient companies to finance and carry out their functions. Decision and policy
making in relation to environmental issues is the responsibility of Defra with the active role
of the Environment Agency in licensing the abstraction of water from the environment and
awarding consents for discharges of treated wastewater into the environment (Bailey, 2002).
It is expected however that the water bill will alter the duties of the regulator by:

aligning the objective to protect the interests of consumers, through the promotion of
competition with the two existing primary duties of the regulator; 117
introducing a duty to contribute to the achievement of sustainable development. 118

However, the economic regulators of the telecommunications and postal services sectors are
already required to have regard to social and environmental policy issues of the markets
which they regulate. As stated earlier, the water bill includes a clause that allows the
secretary of state to issue social and environmental guidance which the regulator should have
regard to.
Under the Telecommunications Act 1984, Oftel, is responsible for promoting the interests of
consumers with regard to price, quality and variety of services. Under the 1992 Competition
and Services (Utilities) Act, the director general of Oftel is also required to set standards of
service to be achieved in individual cases and to determine compensation where those
standards had not been met and set standards of overall performance. In telecommunications,
quality of service has been concerned with tariffs and charges, the size of domestic bill, fault
repairs and compensation schemes. Some of the activities the regulator has undertaken to
promote quality of service involve:

the independent collection of information and publication of quality of service indicators;


the launch of Oftels consumer department to investigate and offer advice on consumer
complaints;
the launch of Oftels price assurance standard (PASS) accredited to websites which
provide accurate and up-to-date price information for consumers; 119
the launch of a website for comparable performance indicators.

With the launch of the Office of Communications (Ofcom), the regulator is also placed under
the duty to protect consumers and take action against industry if the latter fails to develop an
efficient consumer protection regime.
117

Bailey P (2002), Regulation of UK Water Industry, CRI, University of Bath.


The bill also introduces additional duties for the regulator to have regard to the interests of certain groups.
119
Oftel (2002), The Oftel Price Assurance Standards The new accreditation scheme giving consumers
confidence in websites providing price comparison of telecoms services.
118

58

CONSTANTINA BICHTA
In telecommunications, social policy objectives have also been pursued through the use of
regulation ie, allowing for number portability. 120 Health, safety and environmental issues fall
under the responsibility of the Department for Transport and the Health and Safety Executive
(HSE).
The postal services regulator, Postcomm, is expected to have regard to social and
environmental guidance issued by the secretary of state for trade and industry. To date,
Postcomm, has practised this role by enforcing conditions into Consignias licence, requiring
the company to devise special arrangements for vulnerable groups and provide free services
for the blind and partially sighted. The regulator ensures through Consignias licence, that
the company will not show undue preference to, or unduly discriminate against, any one
person or class of persons and will deal fairly with its suppliers and customers. Postcomm is
expected to play a future role in determining environmental issues in the postal services
sector, which at the moment, are principally determined by the governments transport policy
(Department for Transport) and environmental regulation (Defra).
In the rail sector, the scene is quite different given that the responsibilities of the economic
regulator are focusing mainly on monopoly issues and on setting the contractual and financial
framework of the industry. The rail regulator can issue guidance to Railtrack plc relating to
environmental matters.
Railtrack is required to produce a policy for minimising
environmental impact. Consumer interests and health and safety issues are the responsibility
of the Strategic Rail Authority (SRA) and HSE. The SRA oversees the environmental impact
of activities connected with the provision of railway services. 121 Consumer interests relating
to ticketing, passenger security, penalty fares and the interests of the disabled are also the
responsibility of SRA.
The HSE looks after passenger safety. Railtrack is also responsible for overseeing safety of
the track on a day-to-day basis through the independent railways safety activities (ISRA)
body. Soon however, the industry is to have a new rail industry safety body, which will take
over the ISRAs responsibilities and will be involved in developing railways safety
standards. 122 The HSE will retain its ability to prosecute but a rail accidents investigation
branch will be set up to conduct inquires of any serious crashes.

The regulated companies


The discussion now turns to the regulated companies. The objective is to unravel the current
status of social responsibility, as is understood and practised by the companies themselves.
The following sections provide a description of the sector in general and the companies used
as the research sample.

120

BT and Kingston Communications are bounded by their licences to provide a telephone line on reasonable
request; to make available special tariff packages to assist those people with special needs, particularly those on
low incomes; and to establish disconnection procedures which provide people with adequate opportunities to
pay bills. As a result, BT has introduced different user schemes for residential and business customers in order
to ensure that low-income families could have access to telephone (Bichta, 2001).
121
Bichta C, Lawrence G (2002), The Rail Industry in Great Britain Institutional, financial and regulatory
structures, 2nd edition, CRI, School of Management University of Bath.
122
ORR (2002), Consultation on establishment of a new rail industry safety body, Press release; ORR (2002),
Establishment of a Rail Industry Safety Body Provisional conclusions, October.

59

CORPORATE SOCIAL RESPONSIBILITY


Description of the sector
The term regulated industries is used to describe mainly companies from the utilities,
transport and network sectors. In other words, the term encompasses water, gas, electricity,
train, bus, airports, telephone and postal services companies.
The regulated industries in the UK have undergone vast changes from the post-war period to
date. During the post-war period, the prevailing view was that the market failures in the
utility industries were great enough to justify state ownership, vertical integration, and
monopoly. State ownership resolved the conflict of interests between the private and public
good. Vertical integration ensured that customers bore the risk of upstream sunk
investments, and, monopoly prevented the destructive competition, which had pervaded the
industries in the 1920s and 1930s. 123
However, state ownership was abandoned in the 1980s because of monetary, budgetary and
ideological reasons. Companies with a value of 100bn were transferred to the private sector.
With privatisation under way, the merits of vertical integration and monopoly were
increasingly questioned and the possibility of introducing competition was actively
considered.
In this environment, Mercury was created as a competitor to British Telecom (BT) in the
early 1980s. For certain companies in the state sector, the 1980 Competition Act abandoned
the statutory monopoly, the 1982 Oil and Gas (Enterprise) Act limited British Gass vertical
integration into the North Sea, and the 1983 Energy Act provided for private purchase tariffs
and network access in the electricity industry (Helm, Jenkinson, 1997).
These early tentative steps led eventually to the idea of retail customer choice for all gas and
electricity customers, the arrival of cable to rival BT, and plans to introduce competition into
the supply of water. The electricity and (eventually) the gas industries were broken up, and
the railways were split along vertical and horizontal lines.
Gradually, the concept of supply competition caught up on both continents - Europe and the
USA. In line with the 1987 Single European Act 1987 and the aim to create a Single
European Market, the European Commission passed on a number of directives in telecoms,
energy, and postal services resulting to the creation of a European utility policy as a process
of gradually prising open the utility markets (Helm, Jenkinson, 1997). 124
All these events have helped shape the regulated industries in its present form. Currently, the
UK regulated industries play a vital role to the national and local economy, to investment
community and the consumers, for four main reasons:

they make up 10% of annual gross domestic product;


they represent at least 12% of the market capitalisation of the UK stock market;
they provide employment for 4% of the labour force;

123 Helm D, Jenkinson T (1997), The Assessment Introducing competition into regulated industries, Oxford
Review of Economic Policy, 13 (1),pp1-14.
124
In the USA the 1996 Telecoms Act further liberalised the telecommunications market, while the 1992 Energy
Act and the subsequent order 888 by the Federal Energy Regulatory Commission (FERC, 1996) provided for the
transition to a more competitive electricity supply market, at least at the wholesale level. Other countries also
followed the trend of introducing competition, ie, New Zealand, Chile, and Australia (Helm, Jenkinson, 1997).

60

CONSTANTINA BICHTA

they provide essential services to every member of the UK population and to the
European Community in one form or another. 125

The present structure of the regulated industries is very different to that when their
constituent companies were privatised in the 1980s and 1990s. This is due to mergers and
takeovers that took place at privatisation. As Carey (2002) explains, the current structure of
regulated industries is complex since companies are part of multi-utilities ie, Scottish Power
and United Utilities, foreign companies have acquired domestic companies and others
represent a small part of the total business of their ultimate parent company.

Description of the research sample


The discussion now turns to the companies which were selected to represent the sample in
this report. Table 3 lists the (companies) research sample with their parent companies.
The selection of the sample was largely based on company market share; therefore,
companies with the highest market share were selected to represent the research sample. The
decision was based on the grounds that the investigation of CSR practices across the whole
sector would require the use of a survey, which was outside the scope of the present report.
Table 3: The research sample
Sector

Company

Parent Company

WATER

Anglian Water Services Ltd


Dwr Cymru Cyfyngedig (Welsh
Water)
Northumbrian Water Ltd
Severn Trent Water Ltd
Southern Water Services Ltd

AWG
Glas Cymru

South West Water Ltd


Thames Water Utilities Ltd
United Utilities Water plc
Wessex Water Services Ltd
Yorkshire Water Services Ltd

LE Group

British Energy
Innogy Holdings
Electricit de France

RAIL

Railtrack plc

Network Rail Group

TELECOMS

BT
Vodafone

BT Group
Vodafone Group

ENERGY

POSTAL
SERVICES

125

British Energy Generation

Suez Group
Severn Trent
First Aqua Holdings (with a bid from
Vivendi being considered by the
Competition Commission)
Pennon Group
RWE
United Utilities
YTL Power International
Kelda Group

Royal Mail Group

Carey A (2002), Regulated Industries The Governance Contract, CRI Conference.

61

CORPORATE SOCIAL RESPONSIBILITY


The following paragraphs present the current status of CSR in the research sample of UK
regulated industries. The information provided is derived from company reports and
published documents accounting for the companys social and environmental responsibility
and performance.

The water companies


Ten regional companies supply both water and sewerage services in England and Wales. The
water and sewerage companies (WaSCs) are the successors to the publicly owned regional
water authorities established under the 1973 Water Act.
The 1989 Water Act privatised the ten water authorities, created ten water and sewerage plcs
and, conferred on the secretary of state the power to appoint companies to be the water and
sewerage undertaker for England and Wales (Bailey, 2002). A wholly owned subsidiary
company of each plc was appointed as the water and sewerage undertaker for a distinct
geographical area. These subsidiaries are known as the water and sewerage companies and
have been chosen for the research sample in this report.

CSR policy
The term CSR, as defined in Chapter 2, is just picking up in the water industry. The majority
of regulated water and sewerage companies examined in this report do not have a defined
CSR policy or strategy. CSR appears to be part of existing operations systems, ie, investing
in processes that improve environmental impact, maintaining relationships with customers
and suppliers, local community and improving employee performance.
At the moment, only three out of the ten regulated water and sewerage companies have
developed CSR policies and, consequently, have defined business actions and targets to
report performance against. The scene, however, is different amongst the other companies
who appear to lag behind the leaders. Within the context of CSR, the companies priority to
date is to improve and report environment performance. This is justifiable given the arousing
concerns over the quality of drinking and bathing water at the UK and the EU levels since the
early 1990s and the recent regulatory developments in the UK to tackle green house
emissions ie, the climate levy.
Whilst, clearly, the weight lies on improving and reporting environmental performance, the
water companies show signs of being challenged with sustainability, stakeholder perception
of the firm and concerns of integrating economic, social and environmental policy and
performance. As a typical example, the majority of water sewerage companies publish
environmental reports but they also begin to incorporate material that directly relates to social
performance and refers to company relationships with groups the company identifies as
stakeholders.

The role and meaning of CSR


For the three water sewerage companies which have set out a CSR policy, this is developed
around corporate principles and objectives. The CSR policy describes how the firm will
operate in relation to different groups of stakeholders and the priority likely to be given to
each group in decision-making. Generally speaking, community and the natural environment
62

CONSTANTINA BICHTA
are highly prioritised in CSR policy and are usually followed by customers, employees,
suppliers, added value for shareholders, the regional economy and community.
The CSR policy strives to deliver objectives, which vary depending on the firm and the
priorities the firm has set in decision-making such as:

to establish and preserve reputation;


to generate shareholder value and wider benefits for social groups;
to protect and enhance the well-being of the physical environment in which the firm
operates.

Depending on the objectives, consequent actions and targets are identified such as investing
in environmental control, enhancing company procedures on reporting and transparency and
investing in community relations through employee involvement, donations in kind etc.
Thus, according to Table 4 a typical CSR strategy appears to consist of three main elements:
Table 4: CSR strategy - elements
Policy
Objectives
Statement Reputation
Shareholder value
Interest to protect and enhance
the well being of social and
natural environment

Targets
Support of community
programmes
Investing in renewable
energy
Investment in new sewerage
systems
Flexible working hours

As for the remaining water and sewerage companies, those who have yet to develop a CSR
policy and strategy, CSR is approached within the following lines. Information derived from
companies reports suggests that companies are very much concerned with reporting on
environmental protection and performance. Seven out of ten water and sewerage companies
publish environmental reports, some with exclusive reference to sustainability. Protection of
the natural environment and reporting environmental performance is an important aspect of
CSR but it clearly constitutes representation of one stakeholder group in corporate decisionmaking (cf. Chapter 2). Generally speaking, water and sewerage companies tend to refer to
relationships with customers, employees, suppliers and local community either in their annual
reports or by incorporating sections in their environmental reports.

CSR activities of the water and sewerage companies


In this section the activities that the water and sewerage companies undertake in the context
of CSR are discussed. The discussion focuses on six areas of company activity, notably
reporting, type of report, reporting principles, internal groups, adoption of accredited
management systems, independent verification and voluntary participation in CSR indexes.
With regard to reporting, all the water and sewerage companies publish reports relevant to a

63

CORPORATE SOCIAL RESPONSIBILITY


CSR subject. 126 All ten companies report environmental performance, and, as mentioned
above, four companies have moved towards reporting on corporate social responsibility and
publish in this context a social and environmental performance report.
The bulk of all reports is devoted to reporting targets and emissions relating to issues with
an environmental impact. Environmental targets relate mainly to water abstraction, water
quality, wastewater and sewerage treatment. CO2 emissions produced from transportation
and sewage treatment, energy efficiency, use of renewable energy are equally important
themes extensively covered throughout companies reports. To the same end, companies
report on sludge treatment and management and biodiversity plans.
The next, frequently cited, information refers to customer service standards and quality of
service. The majority of the ten water and sewerage companies discuss any progress and
results achieved in comparison to customer service standards set by Ofwat. Employees are a
critical asset to business success and this is recognised by all the water and sewerage
companies used as research sample. To this end, companies have invested in schemes like
investors in people, equal opportunities, whistleblowing and with greater emphasis being
given to health and safety management systems.
Company reporting also covers relations with supply chain and subcontractors, as found
amongst the companies leaders of the water sector. Generally speaking, companies report
specific activities they undertake to educate suppliers and contractors in order to improve
their environmental performance and therefore assist companys efforts in support of
sustainability. All companies report activities corresponding to community involvement.
These activities vary from financial support, donations in kind, partnerships with community,
and support of government programmes for the communitys benefit ie, waste landfill tax
credit scheme.
With regard to the reports published, three out of ten companies publish reports on
sustainability, two out of ten publish reports on environment, quality and conservation, four
out of ten publish reports on environment and society, and one company reports CSR in its
annual report and accounts. The variety of reports used to report and communicate CSR
information suggests that the water sector has yet to develop a clear view and vision of
sectoral reporting on social and environmental performance, which will allow for better
comparisons of performance across water and sewerage companies.
As for the reporting principles and guidelines that the companies use to report performance,
these are mainly in line with governments published guidelines for emissions and waste,
followed by sectoral specific guidelines published by trade associations, international
reporting guidelines and corporate guidelines. Specifically, seven out of ten companies use
Defras guidelines for greenhouse emissions. Out of these companies, three also use
corporate guidelines and trade association guidelines (ie, Water UK sustainability indicators,
126

AWG (2002), The Right Structure for Sustainable Growth, Sustainable Report; Welsh Water (2002), Annual
Report of the Quality and Environment Committee; Northumbrian Water (2001), Environment and Society
Report; Severn Trent (2002), The Environment is our Business Environment and CSR report; Severn Trent
Water (2002), Care 2002 Conservation Access Recreation and Education Report; Southern Water (2001/02),
Sustainability Report; Pennon Group (2002), Enhancing the Environment Environmental and Social Report;
Thames Water (2001), Environment and Conservation Review Care, respect and performance; RWE (2001),
Environmental Report; United Utilities (2002), Social and Environmental Performance Report Reliable,
Resourceful and Responsible; Wessex Water (2002), Striking the Balance; Kelda Group (2002), Annual Reports
and Accounts.

64

CONSTANTINA BICHTA
Association of British Insurers, Electricity Association Environmental indicators, BiTC
reporting structure) in combination with the UK government reporting guidelines, and two
companies use international reporting guidelines (ie, Global reporting initiative) in
conjunction with the UK government reporting guidelines. The need to comply with existing
legal standards appears to drive reporting amongst the water and sewerage companies at the
moment. It may be that reporting is still voluntary, but for the water and sewerage companies
reporting means to adhere to compliance with legal standards, thus attention is given to report
in line with the UK government reporting principles and guidelines.
In the water and sewerage companies, the boards of directors have responsibility for strategic
direction and prioritisation of any CSR related issues. The water and sewerage companies,
however, have also set up CSR committees with the responsibility to review and approve
implementation and performance of systems and targets agreed at the corporate level.
Specifically, eight out of ten companies have set up internal groups or committees with
responsibility to overlook the implementation of environmental programmes, environmental
management systems, health and safety systems and sustainability issues. The name of these
groups varies from company to company. Some of these, for example, are ethics and
environment committee, health and safety committee, environment committee,
sustainable development panel, corporate social responsibility steering group, advisory
panel on environment and sustainability.
The use of environmental management system and particularly ISO 14001, is quite wide
spread across the water and sewerage companies. Half of the companies have already in
place the ISO 14001, whereas one company is working towards implementing the system.
Independent verification of environmental reports is also developing fast amongst the water
and sewerage companies. Six out of ten companies have called upon independent verifiers to
test the accuracy of published information to stakeholders and suggest possible areas for
corporate improvement.
Finally, two water and sewerage companies are included in the FTSE4Good, the newly index
designed by FTSE to ease investment in companies with good records on CSR. Two
companies are listed on the Dow Jones Sustainability Indexes which provides a benchmark
for investment based on the concept of corporate sustainability.

CSR or legal compliance?


The above analysis of corporate socially responsible behaviour in the water and sewerage
companies prompts the question as to whether the companies current attitude and behaviour
corresponds to socially responsible behaviour or just simply corresponds to compliance with
existing legal requirements. It is argued that both determinants of corporate behaviour were
found in the research sample. It is, therefore, claimed that the current attitude of water and
sewerage companies corresponds to socially responsible behaviour, as currently defined
(Chapter 2), but it is also largely determined by existing legal requirements. In addition, the
drive for continuous improvement also appears to inspire and guide the current behaviour and
practices of the research sample.
Activities that correspond to socially responsible behaviour were found, in the light of
company relationship with the local community and others, that could make a difference of a
companys impact on the natural environment, notably, support of biodiversity programmes.

65

CORPORATE SOCIAL RESPONSIBILITY


The long established tradition amongst UK firms to support community and be involved in
community affairs (Chapter 4) was found in the companies selected. The water and sewerage
companies are active community members and contribute to its well being with charitable
donations, donations in kind and employee time spent in community work. For a few of
them, community work extends beyond national boarders as companies co-operate with
European governments in programmes that will either increase environmental awareness of
youngsters in deprived areas or will help them with their education. 127 Support of
biodiversity projects also adds to the communitys well being and companies work together
with wildlife organisations in programmes which protect and enhance a regions biodiversity.
These activities however, are also in line with the UK local Biodiversity Action Plans.
Ultimately, CSR activities will improve shareholder value and secure company brand and
image. The impetus, however, of existing and forthcoming legislation on companies policy
and performance is predominant. Employee issues, customer relations and most importantly,
issues of environmental significance are highly, if not exclusively, determined by legal
requirements (existing and forthcoming).
Companies operate health and safety policies whose effectiveness is measured against the
Health and Safety Executives (HSE) targets and the Institution of Occupational Health and
Safety codes, namely, the UK HSEs Climate survey tool, HSE Commission Code of
Practice, The Asbestos at Work Regulations and Code etc. Like customer standards, the
impact of legislation is predominant in reporting health and safety performance. This is not
surprising, as changes in water regulations have made health and safety training compulsory
for many employees at all levels on the water supply of the business. One of the three
companies with a CSR strategy admits the strong impetus of the latest Health and Safety
Executive strategies on the companys continual improvement and awareness of such
matters. 128 Overall, despite existing health and safety policies, the water and sewerage
companies could improve further their records for eliminating the number of deaths at work
and lost working hours due to work injuries.
Companies report customer service in line with customer services standards set by the
industry regulator. The majority of the sample of companies examined restricts themselves in
measuring and reporting customer service performance almost exclusively in relation to the
regulators standards.
Compliance with law is predominant when it comes to environmental issues. At present,
water companies undertake a significant number of investment infrastructure programmes for
contamination, drainage, sludge, waste and land management, and this is also justifiable in
the light of existing revised and forthcoming legislation from the UK and the EU
governments including the water framework directive and the bathing water and sludge

127

As an example a company works with the German labour office and offers nine months training to adults
with little education. Another company funds an environmental project in Hungary that promises to increase
environmental awareness of local children.
128
These strategies include the revitalising health and safety and securing health together.

66

CONSTANTINA BICHTA
directive (both currently under revision). 129 The UK government climate change levy (a levy
on all sources of energy used for non domestic purposes) has also played a catalytic role in
driving companies to invest in renewable energy, notably, use of natural gas, biogas (energy
from sewerage gas produced from combined heat and power (CHP)) and wind power. 130 The
water and sewerage companies examined are reviewing their energy strategies and looking at
renewable energy production strategies (in response to government targets to reduce CO2
emissions by 20% by 2010). 131 Thus, a strong degree of regulation and avoidance of
penalties and prosecutions guides the attitude of the research sample with regard to the
environment.
Whilst legislation drives the companies environmental policy and performance, company
investment in new processes maximises economic efficiency and assists continuous
improvement, as found in many of the companies. In this vein, companies invest in new
sewerage systems that break down pollutants in sewage before the water is released into
rivers. Companies invest in enhancing waste treatment processes. They also invest in sludge
management methods as sludge can be used on land for non-food purposes and industrial
crops can be refined for producing energy. All the above activities comply with the UK
government strategy for sustainable development but they also assist with the companys
continuous improvement process, whilst maximising efficiency of processes.

The electricity companies


Four types of activities characterise the electricity industry:

generation, which is concerned with the production of electricity in power stations;


transmission, which is the transfer of electricity from individual generation stations to
distribution system entry points, and in certain cases, directly to the premises of end
users;
distribution, which describes the systems of low voltage networks of overhead wires,
underground cables, and substations constructed to bring electricity to end users;

129

The water framework directive is a new directive whose overriding principle is the protection of both people
and the environment, encompassing drinking, bathing water, wildlife and habitats. It is expected to have a large
impact on how water is managed with a number of components to be implemented between now and 2015. The
European Union also considers changes to the bathing water directive, under the stricter guidelines for bathing
waters issued by the World Health Organisation. Issues being considered are the use of health standards to
underpin water quality standards and involve the public in developing action programmes and use the Internet
for information provision. Finally, a revision of the sludge directive, which provides for quality controls on
sewerage sludge that is used in agriculture, particularly to avoid the build up of heavy metals in soil, is expected
in 2003. In Wessex Water (2002), Striking the Balance.
130
The Climate Change Levy was introduced in April 2001. It is a tax on electricity, gas, coal and liquefied
petroleum gas (LPG) used by the non-domestic sector. The levy is intended to encourage business to use energy
more efficiently in order to help meet the UKs targets for reducing greenhouse gas emissions. The levy
includes an exemption for most of renewable energy and for fuel used by good quality combined heat and power
systems, to encourage these environmentally friendly energy technologies. The levy includes an 80% discount
for energy intensive sectors of industry, provided they enter into agreements to meet energy efficiency targets.
In HM Treasury (2002), Tax and the Environment Using economic instruments, November.
131
At Kyoto, the European Union as a whole agreed to reduce greenhouse gas emission by 8%, and the UK
subsequently agreed to a 12.5% as its share. The UK government has since set a separate domestic target of
reducing CO2 emissions by 20% below 1990 levels by 2010. Reduction of CO2 emissions are part of the UK
sustainable development strategy which sets out to achieve the following objectives: to increase investment in
people and equipment for a competitive economy; to improve energy efficiency and tackle waste; to reduce the
level of social inclusion; and to work with others to achieve sustainable development internationally.

67

CORPORATE SOCIAL RESPONSIBILITY

supply (or retailing) of electricity which involves the purchase of electricity in bulk from
generators and its sale on to customers (Simmonds, 2002).

The companies chosen for the research sample operate in the generation, distribution and
supply areas of the electricity industry. In particular, British Energy Generation, a division of
British Energy plc, operates eight nuclear power stations in the UK. Since the demerger from
National Power in 2000, Innogy is the UKs number one supplier of electricity (through
npower its supply business subsidiary) and number two supplier of gas, by volume. LE
Group (part of the Electricite de France Group) is currently the largest UK distribution
network operator.

CSR policy
Do the electricity companies have a CSR policy and strategy? What is the role and meaning
that the companies attach to CSR?
The companies selected have an established tradition in reporting HSE performance since the
mid 1990s. It appears, however, that the development of a CSR strategy and reporting on
CSR is a recent development for these companies. Two out of three companies published the
first annual report on CSR in 2001, containing corporate information on social and
environmental performance.
The meaning the companies attach to CSR is discussed in turn.

The role and meaning of CSR


For the generation company, primary responsibility is to keep safe the operations of nuclear
reactors according the law. Consequently, this is the highest priority in conducting business
responsibly over and above anything else. Having safeguarded the safety of plants,
responsibility lies with overseeing the health and safety of employees and minimising
environmental impact of nuclear reactors and processes. All the above company decisions
are prescribed by legal requirements.
For the distribution network operator, CSR is about measuring and reporting performance
that affects positively and negatively the firms stakeholders. Through the process of
measuring and reporting, the company aims to demonstrate how it manages the economic,
social and environmental impact of its businesses and therefore improve performance and
build relationships with the companys stakeholders.
Unlike the two other electricity companies (and like the water and sewerage companies), the
electricity supplier has developed a CSR policy, which outlines the objectives and targets to
be achieved that are to maximise value for the companys shareholders and stakeholders but
without compromising social and environmental policy objectives.
Therefore for the electricity companies, a CSR strategy seems to consist of the elements
outlined in Table 5.

68

CONSTANTINA BICHTA
Table 5: CSR strategy - elements
Policy
statement
or
measuring
and
reporting
procedures

Objectives

Targets

deliver shareholder value


deliver profitable solution to
stakeholders
operate in an environmentally
and socially responsible
manner
build relationships with
stakeholders
minimise negative impacts,
optimise positive ones

invest in renewable energy


build off shore wind farms
review existing health and
safety systems
identify the causes of fuel
poverty etc.

CSR activities of the electricity companies


Like the water and sewerage companies, CSR activities of the electricity companies will be
discussed in the context of company reporting, type of reports, reporting principles, internal
groups, adoption of accredited management systems, independent verification and voluntary
participation in CSR indexes.
The generation company publishes an annual review on HSE issues. 132 The review
concentrates on the health, safety of employees and impact of company activities on the
natural environment, and compares performance against achieved HSE performance in the
past five years. Performance is measured against regulatory and industry association
specified HSE targets. Specifically, plant and reactor safety is measured against international
standards such as the international safety rating system (ISRS) and the criteria set by the
world association of nuclear operators (WANO) for automatic shut down of reactors by its
safety systems.
Employee safety is measured in terms of injury rate the number of injuries leading to one or
more days off work in 100,000 man hours - and exposure to radiation. A responsible stance
to safety also extends to company contractors who are required to undertake, together with
the company employees, training and risk assessment courses. Overall, in 2001/2002 the
company improved performance against the injury and radiation dose targets which it had set
itself in the previous year.
Together with the health and safety of employees, the company also reports environmental
performance. Environmental reporting concentrates on the areas of energy efficiency,
nuclear fuel use and waste management. Targets met are measured against legal
requirements.
All sites are certified to ISO 14001 and one power station is also certified to the European
Eco Management and Audit Scheme (EMAS). Companys waste management policies for
radioactive and non-radioactive by-products are according to authorizations granted from the
Environment Agency.

132

British Energy (2001/02), Safety, Health and Environment Review Passionate about tomorrow, today.

69

CORPORATE SOCIAL RESPONSIBILITY


As mentioned earlier, both the distribution and the electricity supplier operators have
published their first reports on social and environmental performance in 2001. 133
Companies reporting principles are derived from different sources ie, the distribution
network operator reports in accordance with the BiTC rules Corporate Impact Reporting
Initiative plus, whereas the electricity supplier uses the governments sustainable
development objectives as indicators and targets to report performance against.
Reporting environmental performance is highly significant in both companies. Most issues
reported are on energy consumption, fuel use, carbon dioxide emissions, water use and waste
management (general, special and controlled waste). Due to its commitment to sustainability,
the electricity supplier has also identified indicators for emissions, biodiversity and
landscape.
The importance the companies attribute to the health and safety of employees is demonstrated
in the operation of occupational health and safety policies, drugs and alcohol and work life
balance solution policies. One company also invites employee participation in company
meetings that will affect the future of corporate HSE policies. To enhance employee
performance, companies also operate investors in people schemes, codes of conduct and
equal opportunities policies. Reporting on health and safety policies, however, takes place
against legal requirements such as the Royal Society standards for prevention of accidents
and work, and the governments strategies for occupational health and safety.
Customer satisfaction is also reported and justified as part of the companies legal
obligations. Research activities the companies undertake to eliminate fuel poverty are also
aspects of socially responsible behaviour. Companies refer to projects they are engaged with
in understanding the causes of fuel poverty and help vulnerable customers potentially at risk
of cold. These actions however, are a way for companies to fulfil their obligations under the
regulators social action plan (see earlier).
The companies selected also endorse community involvement. The generation company
publishes statements about public health and how it might be affected from radioactive
discharges. Under the UK Biodiversity Action Plan, the company has developed its own land
management plan to protect and enhance biodiversity. In a similar way, the other two
companies encourage employee participation in community schemes, offer their financial
support to charities and promote amongst pupils education of the safe use of energy and
electricity.
Two out of three companies have also set up committees to review performance related to
social and environmental policy issues, so called corporate social responsibility committee,
health, safety and environment policy and review group, health, safety and environment
committee, environmental steering group, human resources review group. One company
has assigned the committee with the responsibility of developing the companys CSR policy
and set targets and objectives consistent with that policy.
All companies selected are certified to ISO 14001, allowing companies to achieve continuous
improvement. The advantages of management systems towards continuous improvement
have been realised and have led one of the companies to explore the possibility of adopting

133

Innogy (2001), Environmental and Social Performance Review Realising our vision to provide sustainable
performance; LE Group (2001), As One Environment and corporate responsibility report.

70

CONSTANTINA BICHTA
OHSAS 18001 for occupational health and safety and AA1000 to increase stakeholder
engagement in company activities.
Interestingly, both companies who reported social and environmental performance sought
independent verification for the accuracy of non-financial data in their first published nonfinancial reports. None of the companies selected participated in indexes for measuring
corporate responsibility or sustainability.

CSR or legal compliance?


To what extent do all above activities correspond to the notion of corporate social
responsibility? It is argued that practices amongst the electricity companies conform with
existing legislation, and this extends from environmental, health and safety, customer service
to community affairs issues.
Government action in pollution reduction and climate change has played a decisive impact on
the policy and practices adopted by the electricity companies. All three companies undertake
investment to improve energy efficiency ie, the generation company explores how to improve
the efficiency of nuclear fuel use, the electricity supplier recently constructed a new
combined heat and power (CHP) plant to replace the operating coal and oil fired stream
boiler plant, in the knowledge of energy efficiency and environmental benefits accruing from
the new plant.
In line with government strategy for the reduction of CO2 emissions and increase of
renewable energy, two of the electricity companies have already moved into renewable
generation through the development of offshore wind farms and wind power stations. 134 To
comply with government targets for sulphur dioxide emissions (SO2) and oxides of nitrogen
(NOX) the companies either invest in clean coal technologies or strive to optimise generation
of electricity from the existing plants. Generally speaking, companies aim to meet the
authorised limits for emissions whilst optimising the generation of electricity which they
supply. Reporting on greenhouse emissions is in line with Defras guidelines and none of the
companies selected had reduced emissions beyond the legal limit. It seems that because of
the type of business the electricity companies operate and with a portfolio of coal, gas fired,
oil, CHP and wind power generation, they find it really hard to cut down on emissions.
The companies also review their existing health and safety systems in order to company with
the government targets for occupational health and safety. Surprisingly, none of the
companies has moved beyond compliance in issues relating to health and safety, with
exception the case where employees represented their interests in company decision-making
likely to affect the companys HSE policies.
Ofgems social action plans have also played a decisive role in encouraging firms to get
involved in the complex issue of fuel poverty and help low income families to save money
and energy by replacing old inefficient fridges with modern energy efficient ones (through
company participation in energy efficient programmes for vulnerable and low income users).
Nevertheless, the firms selected begin to realise the benefit from operating a CSR policy. For
instance, one company has used the landfill tax rebate to buy land, which will be used for tree
134

Companies invest in off shore wind farms in recognition of government plan to achieve a target of 10% of all
generation from renewable sources by 2010.

71

CORPORATE SOCIAL RESPONSIBILITY


planting by a local trust. The new woodland will also allow the company to have a CO2
offset value of 15,000 tonnes, thus enabling the company to reach its annual emission
reduction targets. Companies could soon use similar schemes to facilitate their entry into the
UK emissions trading scheme.
Company activities, however, which went beyond the law were found mainly in the
development of procurement policies and evaluation procedures of suppliers and the manner
in which they operated towards the environment. Investment in AA1001 which helps
companies to improve accountability and performance through stakeholder engagement and
the ethical charter are promising steps, likely to assist companies move from mere
compliance to compliance plus in the name of social responsibility.

The rail network operator


The sale of the railways in Britain stands amongst the largest network privatisation. The
process leading to privatisation and competition within the rail industry began before the
1993 Railways Act was passed. In 1993, Railtrack was established as a separate division
within British Rail and it was given control of the rail network, consisting of all of the track,
signalling, stations, bridges etc. The company was set up to bear the responsibility for
developing and maintaining the rail infrastructure, for controlling railway operations and for
planning and operating the national rail timetable. 135
Following the passage of the 1993 Railways Act, the actual ownership of the rail network
was passed from British Rail to Railtrack which commenced operation in April 1994 as a
separate government owned company. Railtrack was floated on the London Stock Exchange
on April 1996 and the floatation made Railtrack a publicly owned company, accountable to
its shareholders. On 7 October 2000, the government decided to put Railtrack into
administration. The decision was based on the grounds that the company had failed
consistently to deliver specified targets for network maintenance and improvement, and was
insolvent due to financial mismanagement of investment programmes (Bichta, Lawrence,
2002). On 3 October 2002, Network Rail, a company limited by guarantee (CLG) acquired
Railtrack plc.

CSR policy
Railtrack plc has not produced a formal CSR policy or strategy. The company recognises its
social responsibilities in the name of safety and network reliability as well as protection of
the natural environment. How the company manages these issues in order to operate in a
socially responsible manner is elaborated within the following paragraphs.

The role and meaning of CSR


Being Britains network operator and infrastructure manager, the company sees its primary
responsibility to be the high maintenance of rail network and the delivery of a safe and
reliable railways. Safety relates to network safety and safety at workplace. Beyond safety,
responsibility lies to protect the environment and deliver network improvements in a way that
135

Bichta C, Lawrence G (2002), The Rail Industry in Great Britain Institutional, financial and regulatory
structures, 2nd edition, CRI, School of Management University of Bath.

72

CONSTANTINA BICHTA
are not detrimental to it. Having delivered the objectives of HSE policy, responsibility lies in
communicating this policy to interested industry associates, namely Train Operating
Companies (TOCs), Freight Operating Companies (FOCs) and subcontractors in order to help
build a homogeneous safety culture throughout the industry.

CSR activities of the rail network operator


Railtrack publishes two major reports containing information on the companys HSE policy
and strategy, the network management statement (NMS) and the safety and environment
plan. Both reports are published to meet the companys legal obligations for greater
accountability and transparency following the Hatfield accident in 2000. 136 Under the
industry regulators guidance, the Railtrack Group has set up a railways safety body, which
is responsible for railways safety and is soon to be absorbed by a new rail industry safety
body and the rail accident investigation body. 137
Following the tragic accidents at Hatfield and Potters Bar, Railtrack has conducted an
appraisal of company safety procedures. Safety issues concentrate on four particular areas
including:

strategic safety management;


catastrophic risk and public concern;
train operators, station operators and infrastructure contractors;
health, safety of employees. 138

Safety management is approached with a new safety risk management framework,


responsible for identifying and assessing safety risks. Network safety is safeguarded and
enhanced through network modernisation, and Railtrack has published action plans regarding
network enhancement in line with the SRAs procurement framework for enhancement
projects. 139 Network enhancement is also in line with forthcoming European directives on
interoperability and safety.
In anticipation of the dangers posed on the safe operation of the network when signals passed
at danger, malicious acts, trespass, structure failures and incursions take place, passengers at
stations and level crossings are not properly taken of, the company develops and installs a
number of technical equipment to mitigate and prevent occurrence of these situations.
Consequently, the company has installed the train protection and warning system (TPWS), a
warning system for trains travelling up to 75 miles per hour. The system is later to be
replaced by the Automatic Train Protection (ATP) system which stops trains at higher speeds
from colliding. The ATP will also be in compliance with the European Rail Traffic
Management System (ERTMS) standards.

136

The NMS is produced in accordance with a requirement in Railtracks network licence to describe
maintenance, renewal and enhancement plans for the benefit of train operating companies and rail industry
stakeholders. The safety and environment plan is the responsibility of the safety and operations directorate and
is underpinned by the Railway Group Safety Plan, the HSEs and SRAs strategy for railways.
137
In accordance with recommendations made in the Lord Cullen/Professor Uff report.
138
Railtrack (2002), Network Management Statement Volume 1, National Plans; Railtrack (2002/03), Safety
and Environment Plan.
139
SRA (2002), The Strategic Plan.

73

CORPORATE SOCIAL RESPONSIBILITY


Level crossings have been identified as the second most significant risk in network
operations. The company is soon to announce the development of a new strategy of level
crossing having sought stakeholder consultation. 140 To enhance passenger safety at stations
and on platforms, the company undertakes risk assessments of areas that could cause
accidents to passengers and will inform passengers through poster campaigns. 141
To prevent imported risks into the network from the activities of train operators, station
operators and infrastructure contractors, Railtrack and the above parties have recently agreed
on a new safety system, based on the principle of transparency, which allows Railtrack and
operators to share their safety reports, review trends and agree improvement actions.
Employee safety and welfare is upheld and enhanced through the operation of internal health
and safety systems. The company is looking to implement a new occupational HSE strategy,
targeted to assess compliance with legislation at least in the early stages. 142 Track worker
safety is reviewed and plans are announced for making more green zones available for work
and implementing automated warning systems in red zones. 143 Internal surveys are
conducted to identify the training and development needs of company employees.
For Railtrack, areas of environmental concern are visual impact, pollution management,
resources and energy use, noise and contaminated land.
The company operates an environmental management system that claims to be compatible
with ISO 14001. On an annual basis, it also undertakes a review to identify any positive and
negative impacts on the environment. To date, 36 negative and 7 positive impacts have been
identified. 144 Pollution management issues arise out of oil storage at light maintenance
depots (LMDs) and discharges associated with surface water drainage from the track. To this
end, the company implements the LMD prevention to reach compliance with the Oil Storage
Regulations 2001 within the next three years. The company has set annual targets for
reducing water and energy use. In the light of a forthcoming European directive on
assessment and management of environmental noise, the company is currently reviewing the
system which manages construction noise and is developing a new methodology for railway
noise mapping. Contaminated land issues are handled in compliance with the 1990
Environmental Protection Act.

CSR or legal compliance?


Most of the activities described above are underpinned by Railtracks legal obligations as a
regulated company, and, as a consequence of the accidents at Hatfield and Potters Bar.
There are activities the company undertakes in the context of continuous improvement like
the development of an assurance system for enhancement work for contractors and the
140

Amongst other things the strategy aims to reduce risk from automatic level crossings, data loggers to be fitted
to all automatic crossings etc.
141
That is water leak areas on station roofs.
142
Named HAZID.
143
Green zones are zones where work is physically separated from train movement and red zones are those
where work is taking place under traffic.
144
Top positive environmental aspects: recycling, biodiversity, modal shift, wood use, integrated transport; Top
negative environmental aspects: operational noise, construction noise, fly tipping and discarded materials,
contaminated land, liquid fuel storage, spent ballast, pests, fauna only, protected sites and species, surface water
drainage, graffiti, vibration, fugitive sources. In Railtrack (2002/03), Safety and Environment Plan, pp49-50.

74

CONSTANTINA BICHTA
communication of assurance process to internal and external stakeholders. There are also a
few other activities that could be seen to meet the current definition of CSR. The company
plans to make it mandatory for the supply chain to use Forestry Stewardship Council (FSC)
certified timber for fencing and noise mitigation; the implementation of an internal
walkabout programme to encourage senior executives to develop further the culture of
safety leadership, and the development of joint walkabouts by the company executives and
representatives from TOCs, FOCs and station operators to foster an industry safety culture.
It remains to be seen whether changes in ownership will also make a difference in the way
CSR issues are approached by the company.

The telephone companies


In the UK, the telecommunications industry was the first to be privatised and liberalised.
Competition began with the development of a duopoly competition policy between British
Telecommunications (BT) and Mercury, with the licensing of cable operators to provide
telephony services, and in recent years with the increase of competition in mobile and
internet services.
In the telecommunications industry, a distinction is made between network operation and
service provision.
Thus, four main types of sectors can be distinguished in
telecommunications, which are:

local fixed network operation;


local mobile network operation;
long distance network operation;
service provision over combinations of the above networks. 145

The telecommunications companies selected to represent the sample in this report are both
network operators and service providers for fixed and mobile telephone services.

CSR policy
Both companies have a policy on corporate social responsibility. This policy is derived from
corporate principles and sets out to describe how the company will behave towards its
stakeholders. The companies rank with almost the same priority the groups of stakeholders
namely customers, employees, community, the environment, supply chain, and government.
Companies CSR policy is being developed around the triple bottom line ie, assessing and
reporting on the companys economic, social and environmental performance. In this
manner, companies believe they increase value for shareholders.
The fixed telephone services provider has a long tradition in reporting environmental
performance since 1992. The mobile service provider also operates an environmental

145

Armstrong M (1997), Competition in Telecommunications, Oxford Review of Economic Policy, Vol 13, No
1, pp64-82.

75

CORPORATE SOCIAL RESPONSIBILITY


policy. 146 In recent years, the company have developed the CSR policy to encompass both
social and environmental areas of business operations.

The role and meaning of CSR


The fixed telephone services provider defines CSR as the voluntary actions the company can
take to contribute towards the wider societal goals of sustainable development. For the
mobile services provider, CSR encompasses the impact of company activity on social,
environmental and economic issues, thereby CSR is a process of measuring, reporting and
communicating company performance on all above areas.
In the same way as the water and electricity companies, these companies have developed a
CSR strategy. Accordingly, few elements of the CSR strategy of the telephone companies
are outlined on Table 6.
Table 6: CSR strategy - elements
Policy

Objectives

Targets

Passion for the

return value to the company


return value to customers,

minimise

world around us ie,


to manage the
company impact on
three main areas
society, environment
and economy
To be at the heart of
the information
society

people and the world


maximise the benefits of
information and
communication technology
for individuals
contribute to the
communities the company
operates
minimise any adverse
environmental impact

environmental impact
but also achieve
efficiency that helps
reducing company costs
instituting a CSR
management system
enabling the systematic
management of
corporate social and
environmental risks

Corporate business principles are at the heart of the CSR policy, which strives to deliver
value for shareholders and other groups of company stakeholders.

CSR activities of the telephone companies


Like all other sectors, CSR activities of the telephone companies are discussed in the context
of reporting, type of report, reporting principles, internal groups, adoption of accredited
management systems, independent verification and voluntary participation in CSR indexes.
Reporting on CSR and relevant subjects seems to be a widespread activity for the telephone
companies selected. Both companies publish annual reports on CSR. 147 Issues of health,
safety, mast stations and environment are the next important topic of discussion in
146

Vodafone Group has produced an environmental policy statement, the main elements of which consider: the
use of technology that is not harmful to people and/ or the natural environment; the purchase of environmentally
friendly products only; a commitment to recycle waste when practical; the effort to minimise use of CFCs; the
commitment to preserve natural conservation; and efforts to minimise the visual impact of companys
equipment.
147
BT (2002), Better World Our commitment to society; Vodafone (2001/02) The World Around Us
Corporate Social Responsibility Report.

76

CONSTANTINA BICHTA
companies reports. 148 The fixed telephone services provider publishes a gamut of reports
covering sustainability, stakeholder engagement and company impact on society issues. 149
In terms of reporting principles, these are derived from business principles. Business values
have been identified and company reporting develops around the companys main
stakeholders such as shareholders, governments, customers, employees, communities and
society, health and safety and business partners and suppliers. In essence however, reporting
strives to assess company performance on triple bottom line ie, social, economic and
environmental aspects of business.
Both companies have set up internal groups to steer, enforce and implement CSR policies and
activities at corporate and subsidiary levels. In the fixed telephone services provider, the
corporate social responsibility steering group is being set up to oversee the implementation
of all social and environmental programmes across the group. The company has been
proactive in setting up the European stakeholder advisory panel and the social and
environmental report independent advisory panel responsible for launching debates and
dialogues with key stakeholders either through e-mails or on-line over the internet. The
mobile operator has also assigned a group policy committee and a group operational
review committee with the responsibility for formulating the companys CSR policy. Eighty
CSR representatives are allocated with the task of making this policy operational across
subsidiaries.
So how exactly do these companies practice CSR? The investigation of company reports
suggests that CSR for the telephone companies is mainly associated with customers,
employees, the environment, community involvement, supply chain and government issues.
Customer satisfaction is approached with surveys over quality of products and services, and
development of services for customers with disabilities. Employee issues are enhanced with
company participation to the UN declaration of human rights and the international labour
organizational (ILO) core conventions. As a result, the companies declare commitment to
respect human rights in the countries they operate, to enhance plant-working conditions and
retain basic pay. In 2001/02, the companies published results from visiting plants in east asia.
Both companies employ a diversity of people, they operate investors in people schemes,
and have developed working schemes to match the employees personal life. The fixed
telephone services provider operates the freedom to work initiative which allows people to
develop their own work attendance patterns. Both companies allow employees to participate
in company share schemes. The fixed telephone services provider has set up a company
retirement plan, in which employees receive pension linked to the performance of the fund
rather their final salary at the company. Employee opinions are sought through annual
surveys on regional or corporate issues. The mobile service provider operates internal
leadership programmes for staff development. Employee issues are safeguarded with the
appointment of a group health director and human resources director, as in the case of the
mobile services provider.
Both companies have similar environmental problems to tackle: energy, fuel use and waste.
The mobile operator also faces the problem of unused handsets and the visual impact of base
stations. Energy is used to power the operators telecommunications network, amounting to
148

BT (2002), Masts, mobile phones and health; Vodafone (2002), Answering your mobile phone questions
Mobile phones, masts, health and the environment.
149
See at www.btplc.com/Betterworld/StandardsandPublications/Publications.htm.

77

CORPORATE SOCIAL RESPONSIBILITY


electrical energy equitable of 110,000 UK households, as in the case of the mobile services
provider. From electricity produced, tonnes of CO2 are omitted. In the area of energy
consumption, the fixed telephone services provider appears to be in the driving seat. Last
year, the company purchased 4.6 % of electricity consumption in the UK from renewable
sources. The company also signed a contract for the supply of 1.6TWh of electricity from
combined heat and power, which will further reduce the companys CO2 emissions. In its
latest CSR report, the company claims to have achieved a 63% reduction of CO2 due to the
energy programmes it has operated since 1991, which brings the company well ahead of
government targets for 20% reduction of CO2 by 2010.
Companies operate waste management programmes. Waste is produced by the network and
by offices and is classified as non-hazardous ie, electrical equipment, cables, metal, wood,
handsets. The mobile services provider operates a recycling system for handsets which is
already adopted by eight subsidiaries. Last year, the company collected 800,000 tonnes
handsets, batteries and accessories due to this program. The company is also developing with
one supplier an environmentally friendly handset likely to use recycled plastic and have an
energy free charger.
Base stations are of particular concern to telephone companies for two main reasons: First
because they could cause visual obstructions to the build environment, and secondly, there
are research suggestions maintaining that exposure to radio frequency from mobile phones
and their base stations could cause adverse health consequences. 150 The companies adopted
the pre-emptive approach, first, by using facilities on existing buildings and designing
antennas and equipment to fit in their surroundings - in terms of height, mass, design and
colour. Secondly, by commissioning independent research into radio frequencies (RF) and
impact of base stations on health ie, the mobile services provider has announced investment
of $7million between 1999 and 2007 on research on electromagnetic fields (EMF) and
possible effects on people.
Research on radio frequencies (RF) and the impact of base stations on health is frequently
used by companies as an example to illustrate corporate commitment to community and the
general public. Community involvement also extends to educational programmes, charity
fund raising and employee involvement. The fixed telephone service provider runs school
tours and offers presentations. Through the Per Cent Club, the same company donates 1 %
of its annual pre tax profit to-not-for profit causes. Last year, the mobile service provider
allowed 800 company employees to get involved in community projects.
The companies CSR policy extends further to engage company suppliers. The fixed
telephone service provider currently reviews the procurement process at the corporate level,
in order to incorporate environmental considerations into procurement activities. Therefore,
suppliers are asked to identify their environmental impacts. The same company also
launched a supply chain initiative sourcing with human dignity aiming to establish
principles for working conditions that the supply chain would subscribe to.
Both companies admit to the impact of regulation on corporate affairs but they distinguish
themselves from making donations of any kind to political parties.
The fixed telephone service provider has operated in accordance with the ISO 14001 since
1999, whereas four subsidiaries of the mobile service provider are certified with the same
150

78

Independent Expert Group on Mobile Phones (2000), Mobile Phones and Health.

CONSTANTINA BICHTA
system. The mobile operator also relies on an internal management system to drive and
shape the groups CSR activities.
The mobile operator is listed in the FTSE4Good and the Dow Jones Sustainability Index.
The fixed telephone service provider was ranked the worlds number one telecommunications
company in the 2002 Dow Jones Sustainability Index.

CSR or legal compliance?


The exercise of corporate social responsibility as an activity that goes beyond the law and
represents the interests of non-financial shareholders is a practice the telephone companies
are familiar with. The analysis of the evidence suggests that the telephone companies
practice CSR in a manner that goes beyond the law and which places them on the highest
place amongst peers from the UK regulated industries.
Environment is a stakeholder whose interests are represented in the companys decisionmaking. The fixed telephone service provider has begun to look at product stewardship,
which is to minimise the environmental impact of products through the entire life cycle. The
company has completed an eco-design assessment of 18 products supplied to it, with the
intention of using the assessment to make recommendations to manufacturers on how to
minimise resource use, extend product life and assess second life options. As part of the
company CSR management system, the mobile serve provider begins to integrate HSE issues
into the internal training courses. Improving environmental awareness through experience is
also popular amongst these firms ie, the fixed telephone service provider has conducted a
number of internal studies to quantify the social and environmental impact of
videoconferencing and e-business. The lessons taught are now used to educate customers
regarding the potential benefits and drawbacks of using them. A socially responsible stance
also extents to include the supply chain and procedures are established to ensure ethical
sourcing in supply chain.
Both companies honour legislation and many of the activities they describe in the context of
CSR are dictated by existing and possible forthcoming legislation. The fixed telephone
service provider provides equipment and services to match the needs of disabled, individuals
with special needs and those people on low incomes but this is also in accordance with one of
its licence conditions. The mobile service provider has allocated a considerable amount of
time and money on research exploring the possible links and effects of human exposure to
EMF. Could however, the company have done otherwise when the UK government has
taken the precautionary principle and distributed leaflets to children to encourage them from
limiting the use of mobile phones?
Whilst payroll giving is another popular activity amongst the companies, it also falls under
the fiscal instruments operated by the UK government to encourage responsible behaviour.
Overall, it appears that a mixture of voluntary activity and legal compliance can best describe
the socially responsible behaviour of the telephone companies.

79

CORPORATE SOCIAL RESPONSIBILITY

The postal services operator


The Royal Mail Group plc has dominated the UK postal services market since the 1960s.
The Group became a wholly government owned company when the 2000 Postal Services Bill
received royal assent and it was renamed into Consignia. A reversion to Royal Mail was
finally agreed last year. Currently, the Group serves customers through three main brands,
namely Royal Mail, Parcelforce Worldwide and Post Office.

CSR policy
The group has not developed a formal CSR policy or strategy yet. It is in the process of
publishing its first environmental report in 2003. Therefore, a lot of information discussed in
the following paragraphs will be in the context of company environmental performance, as it
is the only information easily accessible. 151

The role and meaning of CSR


At the present stage, the companys main responsibilities lie in relationships with society,
community and the natural environment. Business focus is on retaining and building
relationships with people, the company recognises the impact of business activities on the
environment and commits itself to take full account of environment affects and ethical
consequences.
The company has produced an environmental policy statement setting out to deliver sort and
long term objectives. This policy attains the evaluation and reduction of company impact on
the natural environment. The objectives to achieve are: to integrate environmental and social
considerations in business decision-making; establish performance indicators along with key
measures and associated improvement targets; develop and implement EMS; comply with
environmental regulation; promote transparency through company reporting; promote the
prudent use of fuel, energy, water and raw materials, minimise waste; reduce air emissions;
encourage the implementation of environmental programmes by company employees;
support community programmes; work with suppliers to minimise impact of company
operations.
Table 7 summarises the main elements of the corporate environmental strategy for the Royal
Mail Group.

151

80

All information was retrieved from the companys main website, see www.royalmailgroup.com/society.

CONSTANTINA BICHTA
Table 7: Corporate environmental strategy - elements
Policy

Objectives

Targets

evaluate and reduce

integrate environmental and

develop an EMS for

environment impact

social considerations in
business decision-making
establish measurement and
reporting procedures
develop and implement
EMSs
comply with the law
promote prudent use of fuel,
energy, water and raw
materials
reduce air emissions
encourage implementation
of environmental
programmes by company
employees

implementation across
all business subsidiaries
build environmental
considerations into
supplier selection
develop innovative
technology for electric
vehicles etc

CSR activities of the postal services operator


At the corporate level, weight is currently placed on assessing, measuring and reporting
environmental performance. The executive board member for strategy and business
development has responsibility for environmental policy and performance. The head of
environment is responsible for developing environmental policy and ensuring that the group
has deployed it. The company has also plans to appoint environmental policy representatives
to communicate the policy throughout the business.
Areas of environmental concern for the company are energy, water and fuel use, waste and
emissions from transport. The company has produced environmental targets to achieve in
relation to the above areas, which reflect both short and long term strategic environmental
management. These targets include:

a reduction in overall energy consumption for building use by 10% over 5 years;
a progressive increase in the usage of renewable energy rising to 10% by 2010;
a reduction in water use by 5% over 5 years;
a reduction in group wide fleet fuel usage by 5% per year;
a reduction in CO2 emission arising from company distribution operations by 5% over a
rolling 3 year average;
a reduction in the quantity of solid waste of 5% based on landfill tax paid, year on year. 152

In the meantime, the company is already taking steps towards meeting these targets. Many
company sites are certified with ISO 14001. The company is also in the process of
developing an EMS to be implemented across the organisation. This system is designed to
allow for measuring and reporting performance of company units and identifying areas for
improvement. Specifically, under the system, energy and water consumption is measured,
poorly performing sites are identified and actions for improved performance are sought.
152

www.royalmailgroup.com/society.

81

CORPORATE SOCIAL RESPONSIBILITY


With regard to energy consumption, the company has set a target to use 1% of renewable
energy in 2003. To meet this target, it operates 21 combined heat and power plants. Waste is
produced from paper machinery and IT equipment. Under the company EMS, a waste
management system for recycling and/or reuse of bikes, uniforms, computers, and toner
cartridges is in operation. 153
Air emissions are created from distribution operations, personal business travel and running
of company properties. The company has introduced an e-meetings service for company
employees and video and audio conferencing facilities in an attempt to reduce travel for
business meetings.
To be able to reduce emissions from transport and fuel use, the company invests in alternative
vehicle technology which promises to reduce use of non renewable fuels. A small number of
company vehicles are powered with alternative fuels like biodiesel, biodiesel mixtures, fast
charge electrics etc. Since 1997 the company operates electric vehicles for distribution in
London and the surroundings areas as they produce zero emissions and reduce noise
significantly.
The company recognises the importance of sustainable development and uses its procurement
strategy as the path towards it. Sustainability is one of the seven criteria for performance
measurement of all suppliers participating in the companys first class supplier programme.
While the general public sees the Post office in Britain as being an essential part of the
British culture, the company wishes to retain this culture by investing time and resources into
community work. 154 In continuance with its tradition of producing resources for schools, the
company produced last year the Lets all write together pack to teach children how to
explore different forms of letter writing. Similar school sources comprise The big book
which covers events that have shaped the world and images linking up to the millennium
stamps.
The company supports charity work. In January 2001 it set up the stepping stone fund that
raises money for charities helping adults to improve their writing skills. 45 projects will be
sponsored from the fund in 2003. Employees are also encouraged to donate to charities
through the payroll-giving scheme administered for Royal Mail by Charities Trust. Company
employees donated 12.5m to charities last year.
The company conducts also a number of activities that form part of the companys strategy
for continuous improvement and which, is believed, are likely to contribute and enhance the
company CSR stance. Specifically, the company works with EA technology and Transport
Action Power Shift to trial an innovative fast charge technology for electric vehicles which
extends the usable range of depot based electric vehicles by virtue of its ability to recharge
batteries very quickly. Through its procurement strategy the company is working to build
environmental considerations into supply chain and encourage them to implement sustainable
development standards. The company has also prepared a stakeholder dialogue plan which
has identified the companys environmental stakeholders and procedures for developing
dialogue and communication with them. The programme will come in effect in 2003.

153

For example, bicycles which are replaced are sent to charities for reconditioning and then dispatched to
Africa.
154
Bichta C (2002), Regulation of UK Postal Services, CRI, School of Management University of Bath.

82

CONSTANTINA BICHTA
CSR or legal compliance?
A number of activities the group undertakes to meet its social and environmental policy
objectives are also in compliance with legal requirements. The company expresses a
commitment to provide a postal delivery to every address in the UK every working day,
thereby meeting a condition on its licence to operate.
The company has introduced new measures for improving services for disabled customers,
also in compliance with its licence condition. 155 New measures the company has undertaken
in packaging are also underpinned by its legal obligations and compliance with codes of
practices. Being involved in the development of packaging solutions, the company had to
comply with packaging waste obligations, which require the producer to consider the
environmental impacts of product. The company discharged this obligation through
membership of a packaging compliance scheme.
Whilst clearly the emphasis is being put on environmental performance, it remains to be seen
whether, and how, the postal services operator will use this experience to develop a cohesive
social and environmental policy and strategy.

155

Some include lap trays for people who are unable to access the counter; pengrips for people with reduced
manual dexterity; pension book templates and signature guides to help visually impaired people, available on
line at www.royalmailgroup.com/society.

83

CORPORATE SOCIAL RESPONSIBILITY

84

CONSTANTINA BICHTA

6 CONCLUSIONS
The objective of the research report has been to explore the role of corporate social
responsibility (CSR) in government policy. The report has used the experience of current
CSR practices in the UK regulated industries to examine the relevance of CSR in government
policy and in the UK regulated industries in particular.
The report has paid attention in defining corporate social responsibility and explaining the
competing views surrounding the notion, which consequently have shaped the development
of two competing models of the corporation, the input-output model and the stakeholder
model of the firm.
The report has concentrated on describing the development of political views surrounding
issues of corporate governance and social responsibility of the private corporation in Britain.
Attention has been given to political proposals and policy development which reformed
corporate governance in Britain during the twentieth century, leading up to the current review
of company law and the proposals to widen the duties of company directors and require from
companies environmental and social reporting. The discussion on the political reforms
pertaining to the social responsibility of business has also captured the current prevailing
views offered by the UK and the EU government for increased socially responsible behaviour
of the corporate sector, which maintain the economic justification of CSR, its voluntary
adoption, the business case for it and its contribution to the objectives of sustainable
development.
In turn, the report has focused on the experience of CSR practices in the UK regulated
industries. Seventeen companies have been selected for the research sample, representing the
water and sewerage, the electricity, the telephone, the rail and postal services network
operators. Investigation and analysis of company reports and published documents was the
method used to shed light to the currents status of socially responsible behaviour in the UK
regulated industries.
The implications of the research findings for government, industry and the notion of CSR are
discussed in this chapter.

The practical meaning and role of CSR for the UK regulated


industries
The first important question to address is what is the practical meaning and role of CSR for
the companies examined?
According to the current definition of CSR (Chapter 2), it describes corporate behaviour that
exceeds legal requirements and involves decisions representing the interests of other
stakeholders of the firm rather than shareholders, which may include employee welfare,
working conditions, protection of the natural environment, relations with customers, supply
chain, local community and the government. To what extent current practices in the UK
regulated companies match to this definition?

85

CORPORATE SOCIAL RESPONSIBILITY


To elaborate upon the current meaning and role of CSR in the regulated industries, the
examples of two cross cutting issues for the companies examined, green house emissions and
occupational health and safety, will be used.
Green house emissions are an area of concern for most of the companies-sample. Companies
develop in-house strategies to reduce emissions, which could also help tackle climate change.
Towards developing a strategy to reduce green house emissions, the research sample appears
to have considered the interests of various groups of corporate stakeholders. Specifically, the
first stakeholder the companies have considered is the government: Companies have looked
at the legal requirements imposed on them. The second stakeholder the companies
considered is the environment: companies set targets regarding the minimum and/or
maximum amount of CO2 tonnes they could emit per year or over a longer period of time.
Some companies also engage the company employees: they develop internal training
programmes to increase employee awareness about energy use and efficiency, to encourage
efficient use of energy in the office and the efficient use of equipment. Companies also
examine how the supply chain could possibly contribute to the corporate strategy for
reducing green house emissions: companies review procurement policies, they use
environmental performance criteria over suppliers selection and educate suppliers how to
best practice environmental control. In some cases, companies have also engaged the local
community and the final customer: proper use of the product and product stewardship are
beginning to be explored as practices to optimise the company strategy for improving energy
efficiency and reducing CO2 emissions.
The above findings suggest that the concept of stakeholder engagement begins to develop
amongst the UK regulated companies. The companies behaviour, however, towards
reducing green house emissions do not meet the current definition of CSR (as described in
Chapter 2). This is because, with the exception of one company, none of the companies
examined had reduced emissions beyond the legally required levels.
From the above, it can be suggested that whilst companies are moving towards engaging
stakeholders in strategy development, attitudes and behaviour of the UK regulated companies
are mostly in compliance with the law and cannot be described as corporate socially
responsible behaviour. The government seems to be the major driving force behind
corporate activities and measures to reduce green house emissions, and tackle climate change,
ie, the government commitment to achieve 10% of energy generation from renewable sources
by 2010.
On the other hand, health and safety issues in the UK regulated industries are approached
with a manner, which in many cases has exceeded legal requirements.
In their majority, the companies heath and safety policies have been informed by existing
legal requirements, amongst which the HS standards for occupational health and safety and
the Discrimination and Equal Opportunities Act. The companies, however, also begin to
engage their employees. Companies conduct surveys to assess employee satisfaction
regarding existing HS schemes; other companies invite employees to participate in meetings
in which health and safety policies are decided. Companies also begin to question their
suppliers about working conditions in their sites.
Therefore, in the light of developing a strategy for health and safety, a number of corporate
stakeholders have been considered in the formulation of the companies health and safety
86

CONSTANTINA BICHTA
policies. It appears that the UK regulated companies are beginning to explore the benefits of
consulting the corporate stakeholders in decision-making and implementation.
Overall, it is believed that current practices amongst the research sample correspond to best
practice, as companies begin to assess the impact of company activity on corporate
stakeholders, explore the benefits of investing in alternative energy sources and examine
product stewardship and the entire life cycle of both products and processes.
It has also become clear that best practice is driven by efficiency gains, commercial benefits
or the business case for it. Investment in combined heat and power plants has improved the
economic efficiency of the companies by reducing the amount of energy purchased from the
national grid. Investment in sludge management methods can assist the companies energy
efficiency plans further with the production of industrial crops that can be refined towards
producing energy.
Government pressure to deliver outputs and the risk of pressure from corporate stakeholders
underpins the current behaviour of the UK regulated companies. The business case drives
best practice and not CSR decisions in the UK regulated companies.

The impact of CSR practices on regulatory policy


If the current practices in the UK regulated industries do not conform to CSR behaviour, what
are the implications for government and government policy?
It has been argued that current practices in the UK regulated companies conform to best
practice rather than to CSR. Companies also find it difficult to adopt best practice and invest
in new technologies. For instance, by being in the business of producing energy, the
electricity companies find the government targets for renewable energy and sustainability a
real challenge. Large companies in the sector have only recently began to experiment with
offshore wind farming whose future success will depend on customer demand. 156 In the
water sector, there is a clear division between conformers with environmental regulation
and leaders in environmental control with undergoing investment programmes in energy
efficiency and wastewater management methods.
Government, therefore, might have a role to play to promote best practice amongst
companies and help companies move towards socially responsible behaviour.
To help companies realise the benefits of best practice, government need to make them
measurable and quantifiable. To this end, environmental and social reporting guidelines need
to be accompanied by measurable performance indicators. These indicators could have been
the collective work between government, industry and trade associations.

156

On September 2001, LE Group launch the green tariff for residential customers of London Electricity and
SWEB. Customers are invited to make a contribution to the Green Energy Fund, which is used to fund
community based, small scale renewable energy projects around the UK. In return, LE matches the customers
contribution to the fund, provides customers with an energy efficiency package and matches the customers
consumption with energy generated by renewable sources. Since months after its launch, the tariff had attracted
14,000 customers and generated funding around 250,000. LE Group (2001), Environment and Corporate
Responsibility Report, p.22.

87

CORPORATE SOCIAL RESPONSIBILITY


Companies will be more prone to move towards best practice, if there is suffice collective
evidence to support increased value return resulting from social and environmental policies.
Of course, there is the question of whether performance indicators should concentrate on
sectoral performance or whether they should also measure issues of international interest like
sustainable development. International frameworks like the UN Global Compact and the
Global Reporting Initiative may provide a useful framework for developing performance
indicators at the national level, which can also be used for comparing and measuring
performance at the international level.
The government, therefore, can set the mood for industry to move towards best practice. The
experience acquainted from the regulated industries suggests that there is little consensus
amongst the reporting principles used by the firms to measure and report performance, thus
making it very difficult to compare improvements in performance across the companies. If
industry is reluctant to enforce its own standards for sectoral reporting, then mandatory
company reporting might be one of the most powerful tools used by government to encourage
firms move on measuring and quantifying economic, social and environmental performance.
In turn, the soft measure of mandatory company reporting enhances corporate exposure to
public scrutiny. Given the attention that the research sample has paid to the relations of the
firm with its customers, the community and the general public, it can be assumed that a well
informed consumer can exert a certain amount of pressure on a companys social and
environmental performance. The public has the power to seek change of corporate policies
either by putting direct pressure on the firm or through consultation meetings with
government that could lead to the development of legal measures.
Overall, the enabling role of government can be seen as being twofold:
to create the environment for business to adopt best practice;
help business realise the benefits of seeking legitimacy from the corporate stakeholders as
well as the companys shareholders.

The impact of CSR practices on the institutional structure of the UK regulated


industries
If companies in the UK regulated industries are not prepared to take the initiative for
practising CSR and given the enabling role that government can play in social
responsibility what is the impact of the research findings on the institutional governance
structure in the UK regulated industries?
First, there is the question of regulation. To what extent is current regulation supportive of
CSR?
It appears that the social and environmental guidance issued by government to the economic
regulators is beginning to produce results. Companies from the electricity sector undertake
research programmes designed to address fuel poverty. The postal and telephone services
operators have introduced schemes for improved services for disabled customers and people
with special needs.

88

CONSTANTINA BICHTA
To the above, the government could also examine the possibility of mandatory reporting and
developing with industry performance indicators for measuring and comparing performance
in economic, social and environmental issues.
In the light of the role of the economic regulator, the government approach is that the
economic regulator should make an appropriate contribution towards achieving sustainable
development..and economic regulation should be conducted in a way that is alert and
consistent with the governments wider and social and environmental goals. 157 Therefore, it
may be that the economic regulators should expand on its role to assist government with its
social and environmental policy objectives by initiating stakeholder engagement in the
development and implementation of social and environmental policy. After all, social
responsibility is about stakeholder representation in decision-making and the economic
regulator can play an important role in furthering stakeholder dialogue (through consultation
meetings, community surveys, meetings with target groups) and assisting with the
representation of stakeholder interests at the corporate level.
To the task of helping government to enhance the social responsibility of companies in the
regulated industries, the economic regulator can assist first, by engaging in effective
stakeholder dialogue and second, through effective price control. This latter view maintains
that if companies within regulated markets are to implement social requirements, the
economic regulator will have to be engaged in setting the price controls correctly, so that
companies are able to cover the costs of social responsibility and allocate resources from
profitable to less profitable customers (The Utilities Journal, 2001).
There is, of course, a role to play for the companies themselves. A more proactive industry
stance in CSR reporting must be adopted and the conformers of the regulated industries
should consider learning lessons from the leaders and work together towards the development
of cross sectoral reporting of social and environmental performance. The existing indicators
developed by trade associations like the UK Water Industry Environmental Indicatorscould be used as the platform for the development of cross sectoral standards thus allowing
for measuring and comparing performance across the UK regulated industries. This will
allow for consistency in reporting and it will increase the opportunity for optimising
performance through the experience acquired from comparing performance at the sectoral
level.
Finally, the consumer can also make a real difference. There are suggestions claiming that
the percentage of consumers committed to use their purchasing power consistently to support
the providers of environmentally and socially responsible products and services is no more
than 5% of the population. Reliable and ethical information however, remains a very
important determining factor in decision-making and the purchasing behaviour of consumers.
Therefore, it might be that there is not enough ethical and reliable information available for
consumers which they can actually use to act upon. Most importantly, there is substantial
empirical evidence pertaining that levels of green consumerism will rise as the price
difference drops and the retailers offer the products and label them clearly. Nevertheless, the
price difference will drop as irresponsible production starts to be hit by new costs like
legislation, increased transport costs and reputation issues. Clearly, there is a wider scope for
government and consumer activity to help increase the social responsibility of business in
society!
157

The Utilities Journal (2001), CSR or Regulation?, February, pp.14-15.

89

CORPORATE SOCIAL RESPONSIBILITY

Final remarks
Going back to the two competing models of CSR (Figure 3), it appears that current practices
in the UK regulated companies fall within the business case model of the firm rather than
the stakeholder model. The narrow definition of the firm as being an entity that exists to
maximise the interests of the firms shareholders seems to prevail. But the companies
examined also begin to realise that the licence to operate is not static and current social
trends and attitudes have a direct impact on business conduct and activities. For the UK
regulated companies, CSR is a risk management tool that is used to defend company
practices in the light of emerging social trends and can be used to explore further the
commercial interests of the company, by applying best practice.
For the stakeholder model of the firm to gain more ground, research work and government
activity need to concentrate on, and elaborate upon, its legitimacy, accountability and
practicability, and provide evidence lending support to the notion that CSR is not an activity
conducted at the risk of the company owners but, on the contrary, it forms behaviour that
contributes to a companys and the societys increased welfare.

90

CONSTANTINA BICHTA

91

CRI ADVISORY COMMITTEE


Chairman: Professor Ralph Turvey
Members

John Ashcroft, Director, Regulation Value for Money, National Audit Office
Frank Attwood, Partner, RSM Robson Rhodes
Professor Brian Bayliss, Director, University of Bath School of Management
Jim Boudier, Finance and Regulation Director, Thames Water Utilities
Rodney Brooke CBE, Chair, General Social Care Council
Stuart Condie, Chief Economist, BAA plc
Clive Elphick, Group Strategic Planning Director, United Utilities plc
Adrian Gault, Director, Energy Economics, DTI
Professor Stephen Glaister, Dept of Civil Engineering, Imperial College London
Professor Cosmo Graham, Faculty of Law, University of Leicester
Professor Leigh Hancher, Allen & Overy, Amsterdam
Julia Havard, Head of External Relations, OFWAT
Ian Jones, Director, National Economic Research Associates
Ronan Palmer, Chief Economist, Environment Agency
Professor David Parker, Aston Business School, Aston University
Paul Plummer, Director of Corporate Planning & Regulatory Affairs, Network Rail
Professor Judith Rees, Pro-Director, London School of Economics
Frank Rodriguez, Head of Economics, Royal Mail Group plc
Colin Skellett, Chairman, Wessex Water
Vernon Soare, Director, Policy and Technical, CIPFA
Roger Tabor, Strategic Information Director, Royal Mail Group plc
Tim Tutton, UK Director of Regulation, National Grid Transco
Peter Vass, Director, CRI, University of Bath School of Management
Professor Richard Whish, Kings College London
Professor Stephen Wilks, Department of Politics, University of Exeter